Can Upstart's Business Model Live Up to the Market's Expectations?
Expectations are through the roof for the artificial intelligence lending platform Upstart Holdings (NASDAQ: UPST), which trades at roughly 295 times earnings after the stock dove roughly 24% since the company reported third-quarter earnings. Upstart, with its machine learning and 28 billion cells of training data, is seeking to replace traditional credit underwriting such as Fair, Isaac's FICO credit scoring that the company believes is out of date. The company claims to be able to improve loan default rates at banks by 75%. Investors believe the company is onto something big, but I still have questions about whether this business model can live up to the sky-high expectations set by the market.
Upstart is a financial technology company in the business of originating personal loans, but has begun to get into the world of auto lending and also wants to apply its technology to small-dollar loans and then mortgages. Upstart helps customers get loans in two main ways: It does the marketing on its own to find customers and then pass them off to banks and credit unions, or banks can essentially embed Upstart's technology within their websites and branding. Most of the loans are currently referred from Upstart, although the company expects direct branding originations to grow and eventually constitute a larger portion of originations and revenue.
Ideally, Upstart is positioning itself as a software-as-a-service (SaaS) company, where it provides the technology to lots of banks and credit unions that bring in the customers and fund the loans with deposits. Upstart collects a fee for every loan originated through its platform. This is more ideal for them because then Upstart doesn't have to go acquire the customers themselves, which requires lots of spending on marketing and sales. But my big question is whether this strategy of partnering with banks and credit unions will be as successful as the market thinks.
Source Fool.com
