4. Upstart Holdings Inc. (NASDAQ:UPST)
Number of Hedge Fund Holders: 18
Upstart Holdings Inc. (NASDAQ:UPST) is a financial company and an AI lending platform that partners with banks and credit unions to provide consumer loans using non-traditional variables, like education and employment, to predict creditworthiness. This allows it to offer loans to a broader range of borrowers, including those who may be underserved by traditional lenders.
The company has made significant AI model wins, revamped its funding supply, and increased operating efficiency. All of these factors together generated a revenue of $127.63 million in Q2. However, this revenue recorded a 5.99% year-over-year decline. Revenue from fees was down 9% due to higher pricing for prime loans.
However, loan transactions increased 31% year-over-year in Q2, reaching 144,000. New borrowers increased 21% sequentially. The average loan size decreased to $7,700 due to growth in small-dollar loans and again the higher pricing on prime loans.
It recently launched a major improvement to its credit pricing model. The new model, M18, incorporates the Annual Percentage Rate (APR) as a feature. M18 generates ~1 million predictions for each applicant, marking progress in AI-based modeling.
The company automated 91% of core unsecured loans, up from 73% two years ago. Automation is essential for cost efficiency and a better product. It’s expanding into auto loans, small-dollar relief loans, and home equity lines of credit.
Its HELOC product (Upstart’s Home Equity Line of Credit ), available in 30 states, covers 51% of the US population, with an instant approval rate of 42%, up from 36%, allowing applicants to avoid document uploads. HELOCs have zero defaults to date.
Upstart Holdings Inc. (NASDAQ:UPST) is focusing on core personal loan product, which offers significant growth potential. The product has improved significantly in recent years, with advancements in model accuracy, fraud detection, automation, funding resiliency, acquisition costs, and revenue optimization.
Here is what Vulcan Value Partners has to say about Upstart Holdings Inc. (NASDAQ:UPST) in its Q2 2022 investor letter:
“Upstart Holdings Inc. was a material detractor for the quarter. It was a mistake, and we sold our position. Upstart is an artificial intelligence (AI) and cloud-based lending platform. The company uses AI models that are designed to underwrite superior loans with lower interest rates, lower default rates, higher approval rates, and increased underwriting automation. When we purchased Upstart, we believed the company had an excellent product and the addressable market was large.
Upstart’s results during 2021 were impressive. In the first quarter of 2022, the company reported solid results but lowered guidance and, more importantly, used its balance sheet to warehouse loans temporarily. The company’s decision to use its balance sheet to finance its growth surprised us and other market participants, and its stock price decreased dramatically. While we admire the management team, we are less confident in the company’s long-term prospects.
It will be more difficult than we anticipated for Upstart to extend its competitive advantages with smaller banks into adjacent markets such as auto loans and mortgages. As a result, our value for Upstart is unstable and the company no longer qualifies for investment. We are following our discipline and reallocating capital into companies with more stable values.”
