Bank lending disruption increases startup stock

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(Technology stock columnist Jon D. Markman publishes Strategic Advantage, a living guide to investing in the digital transformation of business and society. Click here for a try.)

The financial services industry is under attack. New financial technology software platforms running artificial intelligence are disrupting the way loans are generated.

frames at Upstart Holdings (UPST) said on Wednesday that second-quarter revenue was up 1,018% from a year ago. Banking partners granted 286,864 new loans during the quarter.

And the business is just getting started. Investors should always buy Upstart.

Let’s be clear on Upstart what it does. The business was built from the ground up to disrupt Fair Isaac et Cie (FICO). For decades, banks have used FICO scores to access creditworthiness. Fair Isaac, the undisputed market leader, received a handsome sum for providing the data. It has been a tidy business with few competitors.

Upstart enters data points such as employment history, education, credit experience, banking transactions, and cost of living into a proprietary algorithm to assess creditworthiness. The company claims higher approval rates, lower defaults and lower loan repayments for consumers.

Banks also love Upstart.

The partners took out $ 2.8 billion in new loans in the second quarter, up 1605% year-over-year. Conversion rates went from 9% a year ago to 24% in the last quarter.

The take for Upstart was $ 194 million in sales. Total fee revenue was $ 187 million, up 1,308% year over year. And CEO David Girouard says there’s more to come. The San Mateo, Calif., Based company expects third-quarter revenue to reach between $ 205 million and $ 215 million, with profits between $ 18 million and $ 22 million.

The potential of this business is enormous.

Keep in mind that currently Upstart only focuses on personal loans. Girouard noted in March that the acquisition of Prodigy Software would help the company get into auto lending.

This growth story can certainly support much higher stock prices.

Upstart stocks jumped to $ 171.20 on Wednesday after the results. A simple rally to the top of the current trading range would take the stock to $ 235, a move of 64% from current levels.

Disruptive businesses are explosive. This story is still in its early stages.


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