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The 2 Keys to Upstart’s Success – The Motley Fool

Financial technology company Upstart Holdings (UPST -0.37%) has become one of the most debated companies on Wall Street.

The stock has made both bulls and bears look good. It appreciated more than …….

Financial technology company Upstart Holdings (UPST -0.37%) has become one of the most debated companies on Wall Street.

The stock has made both bulls and bears look good. It appreciated more than 1,200% after its late 2020 initial public offering and has now declined more than 90% from its peak.

Upstart is both a young and volatile company and a business that works in the cyclical consumer lending sector. Push all the fear, doubt, and uncertainty aside. Upstart can still be a long-term winner — as long as these two things keep happening.

1. Remain better than FICO

Upstart is a technology company that uses artificial intelligence to determine creditworthiness for consumer loans. The FICO score has been the measuring stick lenders have used for decades to determine borrower creditworthiness. Upstart claims that credit scores are a broad stroke and people may have low or immature credit, despite being capable of paying back a loan.

Its artificial intelligence digests a cocktail of more than 1,000 user data points to determine borrowers’ capacity to repay a loan independently of their credit scores. Upstart says its technology can approve borrowers at the same rate but see 75% fewer defaults.

It’s a bold claim, but Upstart has backed it up. The company’s Q1 2022 earnings deck included a chart comparing default rates for Upstart’s loans by credit score against its internal grading scale. Upstart showed lower default rates in four of its five tiers.

Let’s hope management updates this chart so investors can see how Upstart’s AI keeps performing throughout a changing economic cycle. However, there’s an even better indicator of whether Upstart’s AI works as advertised.

2. Accumulate lending partners

Upstart doesn’t want to be a lender. Instead, it works with a network of partner banks and credit unions. Upstart wants to originate as many loans as possible by placing its technology in banks or creating loans directly and then selling them off to investors. Upstart isn’t trying to make money on loan interest, which means it isn’t competing with its partner lenders.

It would make sense, then, that more lenders working with Upstart would signal that the technology does work as stated. Upstart has said that its total sales and onboarding process can take between six to 15 months; it’s a big commitment for lenders to make, so success in expanding its referral network could be an excellent sign that lenders trust the AI.

Upstart had just 18 lending partners in Q1 2021, but that had grown to 57 as of the end of March. Of them, 11 lenders have been satisfied enough with the technology to remove the FICO score from their loan application …….

Source: https://www.fool.com/investing/2022/08/05/the-2-keys-to-upstarts-success/

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