Upstart shows the breakneck pace of AI-powered lending

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As growth stocks continue their meteoric (but never completely stable) rise on Wall Street, the question remains: When are triple-digit gains not enough?

Upstart Holdings, an artificial intelligence (AI) -based online lending platform, released results Wednesday, November 10 after the market closed, which showed triple-digit percentage gains in most measures.

As of Wednesday morning, the stock was down more than 16%, trading at around $ 262, well below recent highs of over $ 401. Even with the current decline, they are trading well above last year’s IPO price of $ 20.

The company said revenue increased 250% year-over-year to $ 228.4 million in the third quarter. Trading volume stood at $ 3.1 billion, up more than 241% from $ 909 million a year ago and about 12% sequentially. Profits reached $ 29.1 million, up from $ 9.7 million a year ago.

A deeper dive into the data shows the continued transformation of lending from manual processes that have dominated the space to automated in-line conduits. As a result, management noted, the volume of loans continues to increase.

In the third quarter of last year (before its IPO), the company issued just under 81,000 loans. That tally fell to just under 363,000 in the last quarter, a growth rate of around 348%.

Management also noted that in the six years leading up to the IPO, the company has made 620,000 loans, while in the year since the IPO, banking and cooperative partners Upstart Credit Unions have made more than 1.5 million Upstart-funded loans worth more than $ 16 billion. in the origins.

According to his supplements, Upstart’s total addressable markets are $ 4.5 trillion for mortgages, auto loan origination is $ 672 billion, and personal loan origination is $ 81 billion.

A larger footprint

Management also noted that Upstart had “methodically extended” its footprint. The company is casting a wider net across the entire credit spectrum, with the goal of catching both primary borrowers and potential borrowers with bad credit scores.

Faced with falling stock prices, chief financial officer Sanjay Datta said on the call that the higher volumes also put “downward pressure” on the platform-wide conversion rate, down sequentially from 24.4% to 23%. At the same time, the percentage of automatically issued loans increased from 71% to 67%.

“New borrower profiles will tend to have more conservative instant approval rates until we develop a longer history and greater loan volume for our models to train on,” he said. -he declares.

The company may also encounter other speed bumps. Datta noted that “we are seeing the first signs of a return to the pre-COVID consumer profile, with personal savings rates in the economy now falling to pre-COVID levels, and credit card balances. steadily increasing up to 90% less than pre-COVID levels.

These factors will eventually cause default rates to rise to pre-COVID levels, he predicted. “We believe that any issuer that has not entered this award is likely to experience a deterioration in the performance of its returns,” said Datta. Upstart’s own models, with a focus on cutting-edge technologies to help manage risk, can then be tested further, with the industry as a whole.

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