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Upstart Holdings’ Unique Business Model Could Be Worth $415

Upstart Holdings (NASDAQ:UPST) is not an AI (artificial intelligence) lender, despite what some may think. It’s a very successful AI marketing company. That is why UPST stock has moved up so much since its $20 IPO in December 2020. As of Oct. 29, it was at $330.

a visual representation of the data underlying an artificial intelligence (AI) powered solution

Source: Shutterstock

And this is after the stock fell from a peak closing price of $390 on Oct. 15. As a result, today it has a market cap of $24.46 billion, according to Seeking Alpha. That is a whopping 33 times revenue of $744.4 million that analysts forecast for 2021.

Not to worry. This is still, unbelievably, probably slightly undervaluing UPST stock. I think I can show why in this article.

 Upstart’s Unique and Profitable Business Model

Contrary to common belief, Upstart makes most of its money from referrals and fees it charges lenders, not from making loans. These lenders want to gain access to Upstart’s AI “platform,” i.e, its database of borrowers generated from its AI software. As such, Upstart is essentially a marketing company.

That is why UPST stock should not be valued as if it is a lender. This is despite the fact that it does keep some of the loans its banks fund on its own balance sheet. As a result, UPST stock is worth considerably more than a traditional lender’s value.

For example, look at the company’s most recent earnings. Page 15 of Upstart’s latest 10-Q filing shows a breakdown of its total revenue in Q2 of $187.3 million. Referral fees and platform fees were $169.1 million of the total, or 90.3% of total revenue. The rest is servicing fees.

This is essentially the same sort of business model as Rocket Mortgage (NYSE:RKT) in the mortgage lending business. It is also very profitable, especially since Rocket does not keep many of the mortgage loans on its balance sheet. Instead, it sells them to institutional investors.

In the case of Rocket Companies, they record a “gain on sale” by selling the loans forward, as I described in a previous article. At Upstart, however, the company sells the loans they generate at face value to third parties with little or no profit.

But Upstart charges huge referral and platform fees. That is even a better strategy since it appears to reduce any sort of interest rate or credit risk. I could be wrong about that th0ugh. If that is true, then its quality of earnings is very high.

Where This Leaves Upstart and UPST Stock

It’s hard to say what those fees are, but here is my educated guess. For the six months ending June 30, the total platform and referral fees were $276 million. This is from page 15 of the 10-Q. In addition, the Cash Flow Statement on page 10 indicates that $3.414 billion in loans were bought and sold at the same price (see above).

That implies that the fees it charges work out to about 8.1% of the total loans that it generates in a six-month period. We can use that to estimate its revenue going forward.

For example, Upstart’s earnings release on Aug. 10 reported that it generated $2.8 billion in loans in Q2. This was up 61.85% from $1.73 billion in loans generated during Q1. So, to simplify our estimates going forward let’s assume that QoQ loan growth is 50% quarterly.

That implies that over the next year, total loans will be 5.0625 times the $2.8 billion generated in Q2, or $14.175 billion. This means $11.375 billion in loans will be generated over the next 12 months (i.e, $14.175b -$2.8b). Now if we multiply 8.1% times this number we get potential platform and referral fee revenue of $921.4 million. And on top of that, there will be servicing revenue. Let’s call it $1 billion in total revenue.

By the way, this fits in nicely with what other analysts are predicting. For example, Seeking Alpha reports that eight analysts forecast $744 million in revenue this year and $1.06 billion next year. So now you can see that my estimate, rough as it is, is not that different from others. Plus you can see how the model works.

What UPST Stock Is Worth

Given how fast revenue is growing, and the fact that it is fairly riskless and based solely on loan growth estimates, the market values this very highly.

For example, analysts forecast sales will hit $1.34 billion by 2023. I think it will be at least $1.5 billion by then, given the company’s growth rates. Assuming the economy does not go into recession, which would slow down loan growth, that is very likely.

With this kind of growth, revenue could easily be valued at 25 times sales. That would give UPST stock a market value of $33.5 billion in less than two years. That is 37% over today’s market value of $24.46 billion and implies a stock price target of $414.98 (i.e., 1.2575 x $330 price today).

This is a very good return for most investors. So, despite its recent gains, UPST stock still looks undervalued. This is based on the powerful growth rate in its unique business model.

On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article, directly or indirectly. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Mark Hake writes about personal finance on and runs the Total Yield Value Guide which you can review here.