Upstart (NASDAQ: UPST) has been one of the biggest IPO winners of recent memory, with shares up from a $20 IPO price in December to more than $320 as of this writing. In this Fool Live video clip, recorded on Sept. 16, Fool.com contributor Jon Quast discusses why even though Upstart has performed incredibly well, he recently added shares to his portfolio.
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Selim Bassoul, former CEO, chairman, and president of Middleby, serves as Chief Innovator at The Motley Fool. Jon Quast owns shares of Airbnb, Inc., Pinterest, and Upstart Holdings, Inc. Matthew Frankel, CFP owns shares of MercadoLibre and Pinterest. The Motley Fool owns shares of and recommends Activision Blizzard, Airbnb, Inc., MercadoLibre, Middleby, Pinterest, and Upstart Holdings, Inc. The Motley Fool recommends Caseys General Stores. The Motley Fool has a disclosure policy.
Jon Quast: This is the most recent thing that I’ve bought. It is Upstart Holdings symbol, UPST. I’m going to share my screen here if I can remember. I just want to say there’s really two reasons that I bought this stock. One is company-related and then the other we’ll get to at the end.
But let’s start here with the company. I think that a lot of our members here on Motley Fool Live have heard of Upstart, but just in case, Upstart’s mission is to enable effortless credit based on true risk. They are trying to reimagine the lending and borrowing process specifically for unsecured consumer loans right now. They really feel like the FICO system, that credit score system is a little bit antiquated and they’re trying to bring artificial intelligence into the equation. Help banks make better loans, get people better rates, and help banks not have as many losses.
This is a concept that has really taking off here lately. As you can see, this is revenue here in the most recent quarter, up over 1000% year-over-year. I would like to point out that a little bit. If you look at the two-year, it’s only up around 500%, only 500% still a great growth rate. Just keep in mind that last year in the second quarter revenue was down a little bit. This is a little bit artificially high. But great growth rate, it is taking off really good this concept.
Another thing that I really like about Upstart is this right here, net income. This company just came public within the last nine months, I believe and it is already profitable, became public profitable. Many financial technology companies that you see come on the market are not anywhere close to profitability. For those keeping score at home, that is a 19% net profit margin according to generally accepted accounting principles, there’s no funny business going on here. No accounting wave of the hand. This is real net income here on the bottom line, really really strong profit margin.
One of the things that I noticed when I was digging through, why is this company so profitable? One of the things that it has going forward here is it doesn’t have a whole lot of stock-based compensation on the dragging down the bottom line. If you look at companies like Pinterest (NYSE: PINS), for example, or Airbnb (NASDAQ: ABNB), stock-based compensation is extremely high. As you can see in the most recent quarter 21 million in stock-based compensation, that is relatively not very much. As I went through the SEC filings here, not a whole lot of stock-based compensation left. If you add it all up, this is one area right here than showing you, about $200 million in stock-based compensation that they expect to be recognized over the next three years. Really, don’t expect that stock-based compensation to tick up any.
This is a business that should stay highly profitable as it continues growing. Financially, this is a company that is just getting stronger. As they look ahead, already cash flow positive, they have over $600 million on the balance sheet, no debt, it’s been paid down. Financially this business is only getting stronger from here, that’s one reason I like it. It is also a company that is growing fast in this competitive labor market, these Glassdoor ratings are really important. We see here 4.1 stars out of five, 98% approval rating of the CEO. That is really powerful if you’re trying to attract top talent as you grow the business.
Another thing I’d like to point out is this company’s moat appears to be getting wider. As I said in the beginning, they use artificial intelligence to make the lending process better. They came public with about 10 bank partners just a few months ago. They are already up to 25 bank partners and at a recent interview on CNBC’s Mad Money. The CEO, David Girouard, said that he expects to have hundreds of bank partners in a couple of years. As you think about artificial intelligence, you need data, you need input.
Another bank could come up with a product similar to Upstart, but they are not going to have the data coming in from all of the hundreds of bank partners like Upstart will. Really, you would expect their artificial intelligence to be best-in-class and getting better. As you look at the opportunity for Upstart, it is only getting better right now, really only one product in one geography. They expect to expand internationally. They also expect to offer more products in time, such as auto lending and even potentially mortgages.
This is a company with a lot of upside. Now, that is what I like about the company, but let me tell you about why I really bought this stock now. Can you see this chart here? This is Activision Blizzard (NASDAQ: ATVI), Casey’s (NASDAQ: CASY), FireEye (NASDAQ: FEYE), MercadoLibre (NASDAQ: MELI), and the Middleby Corp (NASDAQ: MIDD) against the S&P 500. This is the first Rule Breaker podcast five-stock sampler. This is something that was revolutionary to me personally as an investor. I used to try to forge my own path. I didn’t really care what others opinions were. I wanted my own opinion and everything that I saw other people recommending. It was always too expensive and I head reasons I didn’t want to buy this podcast really began changing my paradigm and I began to seek out other people’s opinions as well in my investing decisions.
As you can see, one-stock you’re losing to the market. But MercadoLibre has more than made up for that loser and more. This has been an incredible five-stock sampler. I began to realize that there’s a proverb that I really liked that says where there’s no guidance, people fail. But in the abundance of counselors, there is safety. I really have come to value other people’s opinions when it comes to investing. This is Upstart on CAPS Motley Fool catching, go to caps.Fool.com and see how other people are rating companies. As you can see, all star players here, these are people, the best of the best in caps.
Two hundred and six believe Upstart will beat the market from here, zero think it’ll underperform. Talk about good track records Tom Gardner, he owns the stock personally and he has got a 60% accuracy rating in caps. One of the services that I subscribed to, it is a timely recommendation. Part of my investing strategy right now is I allocate some money to the timely recommendations every month. That is why I bought Upstart right now. It’s a small position for me, not even 0.5% of my portfolio. It’s something I would dollar-cost average into in time.