Upstart Goes Car Loans: What You Should Know


BUTArtificial intelligence (AI) is spreading across most major industries, and finance is no exception. As lending is often highly regulated, banks and financial institutions are increasingly using technology to automate processes and reduce burden. Upstart Holdings (NASDAQ: UPST) is a fully digital lending developer helping banks analyze borrowers in unconventional ways, providing higher levels of approval for similar levels of risk.

The company recently announced an aggressive expansion of its auto lending business, which could be interpreted as somewhat opportunistic given the frenzy in the auto industry this year. The pandemic has caused disruptions in the supply chain, causing a shortage of new cars and, as a result, record high prices, which have affected used cars as well. However, some key data suggests that this boom may end, which could temporarily undermine Upstart’s ambitions.

The smiling man sits in the car and holds the keys as if they had just been bought.

Image source: Getty Images.

An evolving opportunity

Consumer price index inflation data has been in the spotlight this year, as investors speculated whether aggressive stimulus from the US government and the Federal Reserve would cause prices to rise significantly. The Federal Reserve is targeting an average inflation rate of 2% over time, but the April figure was 4.2%, sparking heated debate.

However, the unlikely culprit seemingly skewed the data. It turns out that the rise in car prices has been responsible for about a third of the recent spike in inflation – according to auction house Manheim, used cars have risen 48% over the past year. In fact, used car prices rose 10% and 7.3% in April and May, respectively.

It just so happened that during this period Upstart was pursuing plans to rapidly expand its presence in the automotive finance arena, a lending market second only to US mortgages.

In the first quarter of 2021, the company increased the availability of its car refinancing product from one US state to 33 and expanded its dealer network by 45%. It also completed the acquisition of Prodigy, a software provider for car dealerships that digitizes and streamlines the sales process. Upstart says nearly $ 800 million in vehicles were sold through Prodigy in the first quarter, and the next step is integration, so the company may offer funding for some of those purchases.

Loan makers like Upstart often seek to partner with car dealerships where they can attract customers at source – and the dealer also wins by winning the more likely sale. Upstart’s all-digital, AI-driven product offers a faster application and approval process, and Prodigy is a potential path to expand Upstart’s presence.

Possible slowdown

The prospect of rising vehicle prices generally seems far-fetched, given that profits from car ownership are almost never expected. But when stocks at dealerships are in some cases cut by 80%, the lack of supply is forcing consumers to pay more. However, that won’t last forever – and Mannheim’s wholesale used car price index appears to be peaking. After growing 50% over last year, it is now only 36% higher.

On the positive side for Upstart, however, the decline appears to be due to an 18% increase in new car sales in June, suggesting that the supply chain problems associated with the pandemic may begin to subside. As the gap closes, prices should continue to fall, which may even spur demand from consumers expecting insanity.

However, this is not all good news. According to the University of Michigan, only 48% of consumers thought it was the right time to buy a car in May. This is the first time the rate has fallen below 50% since the start of the pandemic. Consumers also don’t expect much improvement as 12-month purchase expectations are currently at their lowest level in a year.

Assessment history

At Tuesday’s prices, Upstart shares were about 30% below their highs set in June. but stocks are still relatively expensive based on earnings. With a market capitalization of $ 9.2 billion and a net profit of only $ 14.6 million, you’ll make a multiple of 600 in the last 12 months. But that’s not all, because the company is growing rapidly. For example, in the first quarter of 2021 alone, it delivered $ 10 million in net profit, which provides astronomical profit growth for the full year.

Revenue growth suggests the same, especially the company’s 2021 forecasts. At the end of 2020, Upstart indicated that it should generate $ 500 million in revenue by 2021, but after completing the Prodigy acquisition, it raised that figure to $ 600 million (perhaps that $ 100 million increase could be due to Prodigy, but Upstart did not offer specific recommendations regarding the potential income of this company).


2017 Nov.

2018 Nov.

Dec 2019

Feb 2020

2021 (forecast)


$ 57 million

$ 99 million

$ 164 million

$ 233 million

$ 600 million

Data source: company documents.

With $ 121 million in revenue in the first quarter, Upstart appears to be on track to meet its annual target. The impressive thing is that if it does, it would mean more than 1000% growth in revenue from 2017 – so it’s understandable that some investors are willing to pay a premium on the stock.

The company raised $ 1.7 billion in loans in the first quarter, so given the impact of expanding car financing, the potential for rapid growth is clear. Since Prodigy was responsible for handling nearly $ 800 million in auto sales in the same quarter, Upstart catching even some of those funded purchases would be a huge tailwind.

Auto finance is the biggest marketplace for new lending, without having to delve into the more complex mortgage industry. With American consumers owing more than $ 1.3 trillion for their cars, Upstart has a lot of room to grow. Investors need to keep an eye on earnings growth because if the company continues to operate at this pace, the stock could very well be cheap compared to 2022 and 2023.

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Anthony Di Pizio does not hold positions on any of the mentioned shares. The Motley Fool owns and is recommended by Upstart Holdings, Inc. disclosure policy

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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