Since Upstart Holdings (NASDAQ: UPST) went public at the end of 2020, its share price has soared more than 320%. To put it plainly, there is a lot to like about this company and its attempt to improve the consumer loan industry.
Still — as with any compelling investment — there are real risks that shareholders (like me) must consider. Here are the three biggest risks I see to Upstart’s business and how the company is managing each thus far.
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1. Fee concentration
Upstart is a lending company using artificial intelligence to collect and analyze more consumer data and quantify creditworthiness more accurately. While it’s opening the door to access affordable credit for millions of people, it’s not actually a lender itself. Instead, Upstart partners with banks and collects fees per loan sourced. The young company collects 96% of its revenue from fees as it directs loan demand to its banking partners.
Cross River Bank, an FDIC-insured lender based in Fort Lee, N.J., is by far its largest customer. In the first quarter, CRB accounted for roughly 60% of Upstart’s revenue. Although there’s no sign of the relationship souring, it always could, and considering the intensity of this partnership, that would undeniably be devastating for Upstart. There are, however, signs of meaningful improvement.
The somewhat alarming 60% of fees metric becomes less imposing when we consider it was 79% in the year-over-year period. To help further, Upstart has added eight new banking partners since going public in December 2020 to reach 18 total and was even named a preferred partner for the National Association of Federally Insured Credit Unions. More partners to collect fees from will help resolve this issue, but 60% is still a hefty concentration, and seeing that continue to precipitously fall would be a welcome sight for investors.
2. Credit Karma and Intuit
It’s not just concentration risk impacting Upstart in terms of bank partners, but also its own loan origination traffic. Traffic from Credit Karma’s service procured 53% of the loans Upstart was able to direct to its banking partners for fees last quarter; that actually rose from 48% the same period the year before. As of now, if Credit Karma were to terminate the relationship for whatever reason, Upstart’s growth would likely take a meaningful hit.
To make things more precarious, right after Upstart and Credit Karma renewed their contract, Credit Karma was purchased by deep-pocketed Intuit. Intuit isn’t yet a direct Upstart competitor, but it’s not a massive stretch to think Intuit could attempt to release a competing Upstart product, especially considering all of Upstart’s success. Intuit has billions in cash to deploy if it so chooses, which Credit Karma did not have access to pre-acquisition. It’s much easier said than done, but still a possibility.
Just like with the CRB concentration issue, there are some signs things are improving. According to Upstart CEO Dave Girouard, direct-to-Upstart revenue channel growth (meaning a consumer visits Upstart.com or a banking partner directly rather than through a third party) is meaningfully outpacing growth from Credit Karma. That has not yet shown up in decreasing concentration, but it will in the future if it continues.
Furthermore, Girouard said at a recent industry conference that Upstart and Credit Karma were essentially the first two companies to resume normal loan marketing activity during the pandemic. The limited options Upstart had at the time contributed to the concentration, and the rest of its traffic partners like NerdWallet are now returning to normal. That should also help resolve this problem.
Finally, a 20% raise to the company’s 2021 revenue guide points to this risk not hurting — at least not yet.
3. Maintaining loan metric leads
The reason banks and Credit Karma/Intuit continue to work with Upstart is not to be nice, it’s because of the concrete approval and annual percentage rate (APR) edges Upstart provides without sacrificing loss rates.
These advantages are the core reason Intuit doesn’t build out a competing product, and why banks don’t try to do the same thing. Upstart must continue to prove itself as the enabler of a higher-quality, larger loan book in order to continue finding growth. If this product turns out to be duplicatable down the line, that would prove to be a large hit to its currently compelling value proposition.
On the organization’s most recent earnings call, management informed investors that an update to its internal algorithm blend led to further lead gains in its key performance indicators. So far so good, but there is a long way to go.
Upstart is not risk-free
Despite the success of the company and the stock since going public, there are risks to consider with Upstart, just like with every other investment. The company has been able to manage admirably through the uncertainty, but that must continue for this investment to keep working. I own Upstart stock, and will continue to monitor these three risk factors very closely going forward.
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