1 artificial intelligence growth stock with explosive upside potential
WWe live in a time where technology is constantly improving the world around us. Some of it is obvious, like the smartphone you might be reading this article on, but some technology is at work in the background to make life more convenient without you even knowing it.
Ordinary Holdings (NASDAQ:UPST) is an artificial intelligence (AI) powerhouse specializing in the latter. It has developed an AI algorithm to be used when users apply for a loan from a bank, leveling the playing field for applicants. It instantly analyzes over 1,600 data points related to applicants’ circumstances to provide a more thorough and complete analysis than the traditional one FICO Credit scoring system that takes into account a much more limited set of data points.
Upstart is rapidly expanding into new credit markets that dwarf the potential of its humble beginnings and could lead to explosive growth in its share price.
Where Upstart’s business currently stands
Upstart itself is not a lender. It earns fees from its banking partners when its algorithm grants them a loan, so the company bears no credit risk. Upstart is therefore not constrained by the same onerous regulations and capital requirements as most financial institutions. That should allow it to grow much faster.
The company initially began issuing unsecured personal loans for purposes such as vacations, medical procedures, and home renovations. But it’s expanded into the much larger auto loan market, and its opportunities in the total addressable market (TAM) have increased significantly as a result.
|credit segment||Annual Total Addressable Market|
|Unsecured Personal (Consumer)||$96 billion|
|Automotive (Consumer)||$727 billion|
In 2021 Upstart bought the software company Prodigy, which developed a sales platform for car dealerships. Upstart saw this as a clear opportunity to meet car buyers where they were (rather than at a bank). It spent several months integrating its lending technology with Prodigy’s sales software, and Upstart Auto Retail was born. Now car dealers can offer financing to their customers using the same platform they use to sell and the growth is rapid.
In 2021, Upstart reported $849 million in revenue, beating even its own forecast of $500 million earlier in the year. It was a dramatic growth acceleration (up 264%) compared to 2020.
What’s fascinating is that the auto loan segment hasn’t even ramped up yet. In 2022, Upstart expects to generate just $1.5 billion worth of auto loans, which would contribute less than 10% to the company’s $11.7 billion in total origination as of 2021. That means there’s still a long way to go for growth.
But it could be just the beginning of an explosive opportunity.
Where Upstart could go
The credit market is broad and diverse. You can borrow money for a variety of things, both individuals and businesses. With unsecured loans and auto loans, Upstart has only scratched the surface of its potential.
The US unsecured and auto loan markets account for $823 billion in annual lending, but adding in small business and mortgage lending could increase this TAM opportunity to $6 trillion.
Upstart highlighted this in its full-year 2021 earnings presentation, which gives an indication of where the company could expand next. Mortgage originating would likely be the ultimate long-term goal given the sheer size of the market, but the small business segment is a more logical next step.
Regardless of which direction Upstart decides to take, one thing seems certain: explosive growth potential.
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The Motley Fool owns shares of and recommends Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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