Is Upstart Holdings, Inc. (UPST) the Best Mid Cap AI Stock to Buy Now?

In the rapidly evolving world of artificial intelligence, one company has emerged as a standout performer: upstart Holdings, Inc. (UPST). With a market cap of just $8 billion, Upstart is a mid-cap AI innovator that has been making waves in the fintech industry. But is it the best mid-cap AI stock to buy now? Let's dive deep into the numbers, the technology, and the market dynamics to find out.



The AI Advantage

Upstart's secret sauce is its proprietary AI lending model, which has proven to be significantly more effective than conventional FICO scores. According to the company, 91% of its loans were approved by automated systems, and its most recent model, Model 18, increased loan origination dollars by more than 15% with the same credit quality in the fourth quarter. This technological edge allows Upstart to approve 101% more applicants than traditional lending models and offer APRs that are 38% lower than traditional lenders.

Financial Performance

Upstart's fourth-quarter earnings report was a smash hit. Loan transaction volume jumped 68% to $2.1 billion, driving revenue up 56% to $219 million, well ahead of the average estimate at $181.9 million. Total fee revenue was up 30% to $199 million, indicating strong, if slower, underlying growth. The company also narrowed its GAAP net loss to $2.8 million from $42.4 million in the quarter a year earlier, and its adjusted earnings per share improved from a loss of $0.11 to a profit of $0.26, easily beating estimates of a per-share loss of $0.04.

Strategic Partnerships and Expansion

Upstart has been busy forming strategic partnerships with banks and credit unions, which have strengthened its presence in the banking sector. For example, DR Bank adopted UPST’s small-dollar loan product to support customers with short-term financial needs, and UNCLE Credit Union partnered with UPST to provide personal loans to new and existing members. These partnerships have enhanced Upstart's footprint in the credit union market by providing flexible and efficient lending tools.

Moreover, Upstart has expanded into new categories like home equity lines of credit (HELOCs), which has driven growth in all key product categories. This diversification has helped the company maintain growth even as interest rates remained elevated.

Market Potential

Upstart has a huge addressable market, estimating it at $3 trillion in loan originations, including personal, auto, home, and small businesses. Personal loans, where Upstart has historically played a large role, represent a small fraction of that at $155 billion, meaning that the company has a lot of market space to grow into.

Additionally, there are other opportunities to monetize its technology beyond just originating loans with the help of its funding partners. One potentially large revenue stream would be licensing its technology. The company had done licensing deals in the past, but as its technology gets more accurate and its performance improves against the FICO score, it should become more valuable to banks and other potential licensors.

Economic Conditions and Interest Rate Environment

Despite elevated interest rates, Upstart's loan volume surged, indicating that its AI-driven lending model is resilient to interest rate fluctuations. The company's ability to approve more borrowers at a lower default rate suggests that it can continue to grow even in a high-interest rate environment.

Upstart's proprietary Upstart Macro Index fell during much of 2024, down 7% in the fourth quarter. This signals that the lending environment should provide a tailwind for the company in 2025, at least compared to 2024. The company's improving technology, expansion in new categories, and increasing conversion rates mean Upstart could be a big winner in 2025.

Analyst Consensus

The average analyst rating for Upstart Holdings stock from 14 stock analysts is "Buy." This means that analysts believe this stock is likely to outperform the market over the next twelve months. The average target price for Upstart Holdings stock is $77.08, with a low estimate of $15 and a high estimate of $108. The average target predicts an increase of 62.99% from the current stock price of $47.29.



Conclusion

Upstart Holdings, Inc. (UPST) is a mid-cap AI stock with a lot of potential. Its AI-driven lending model, strong financial performance, strategic partnerships, and expansion into new categories make it a compelling investment opportunity. Given the current economic conditions and interest rate environment, Upstart's trends are sustainable, and the company has a large addressable market with significant growth potential. If you're looking for a mid-cap AI stock to buy now, Upstart Holdings, Inc. (UPST) is definitely worth considering.

Ask Aime: Is Upstart Holdings a good stock to buy?