When it comes to artificial intelligence (AI) stocks, Upstart Holdings Inc. (ticker: UPST) might not be the first company that springs to mind. Yet, its innovative approach harnessing machine learning for credit assessment is gaining attention and credibility in the financial sector. As investors scour the market for stocks that can leverage AI technology for sustainable growth, Upstart stands out for its unique offerings and recent performance, intriguing Wall Street analysts to take a closer look.
Upstart has developed a credit platform that utilizes advanced data science techniques to assess creditworthiness more effectively than traditional FICO scores. Despite experiencing significant volatility due to the challenges associated with profitability, Upstart has a compelling case for its long-term potential. The credit sector isn’t without its risks, particularly given economic variability and the potential discontinuation of funding by its credit partners.
Recent earnings reports have bolstered confidence in Upstart’s future. In the first quarter, the company recorded a staggering 102% increase in transaction volume, reaching approximately 240,706 transactions. Additionally, loan originations surged by 89% to $2.1 billion. A significant contributor to this improvement was an updated AI model that enhanced the conversion rate from 14% to an impressive 19.1%. This model can generate up to 1 million predictions per loan applicant, determining the likelihood of loan approval and the interest rate to be charged.
From a financial perspective, Upstart’s revenue has experienced a robust 67% leap, amounting to $213 million, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) remarkably shifted from a loss of $20.3 million to a profit of $42.6 million. These figures portray a positive trajectory that has caught the eyes of various Wall Street analysts, prompting a wave of renewed optimism surrounding the stock.
According to data from Tipranks, of the 11 analysts who have recently provided ratings on Upstart, four have labeled it as a “buy,” while seven recommend it as a “hold.” On average, analysts project a price target of $65.33 for the stock, suggesting an upside potential of around 39%. Among the most optimistic voices are Peter Christiansen of Citi, and Dan Dolev of Mizuho, both assigning a price target of $83. Kyle Peterson of Needham follows closely with a target of $70.
The bullish sentiment among these analysts can be attributed to several factors. Christiansen highlights the growing interest from private credit managers and the improving partner network that Upstart has been cultivating. Dolev reaffirmed his buy rating after previously double upgrading the stock, attributing the company’s enhanced profitability to its innovative AI-driven model. Similarly, Peterson points to a strengthening funding environment and improved balance sheet as critical drivers for Upstart’s stock price enhancement.
However, while Wall Street forecasts provide a helpful context, they should not serve as the sole reason for investment decisions. Criticism of Upstart exists, with nearly 25% of the stock sold short amid concerns about its operational challenges. Notably, Goldman Sachs issued a sell rating for the company back in February, with a conservative price target of $15. Nevertheless, Upstart’s evolving business landscape indicates a positive shift.
The company is increasingly expanding into underpenetrated markets, specifically auto and home loans, which represent substantial avenues for growth. In the first quarter, auto loan originations escalated fivefold from last year to $61 million, while home loans surged six times to $41 million. Though these figures currently represent a small portion of Upstart’s overall business, they signal significant future potential.
One of the most crucial aspects of Upstart’s operations is its business model’s scalability. The tech-driven platform automates over 90% of loan applications, enabling the company to scale efficiently and take on more loans with a relatively low incremental cost. Operating expenses saw only an 11% increase in the first quarter, even as fee-based revenue increased by 34%. This dynamic speaks to Upstart’s ability to manage operational efficiency while expanding its reach.
Upstart’s competitive advantage is further underscored by its technology-fueled momentum in customer demand and funding partnerships. Many of these factors are coalescing to suggest that if Upstart continues on its current trajectory, profitability could improve at a swift pace in the near future.
In summary, Upstart Holdings Inc. appears well-positioned for growth within the expansive AI sector, particularly in credit assessments. With its latest financial results showcasing notable improvements and several Wall Street analysts expressing bullish sentiments about the stock, it makes a strong case for potential investors. While caution is advised, given ongoing market volatility and inherent risks in the credit business, those looking for innovative AI stocks should consider keeping an eye on Upstart. With a considerable runway for growth ahead and a robust competitive advantage driven by its technology, it seems that opportunity might be knocking for this AI stock.
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