Reached (NASDAQ: UPST) was one of the biggest IPO success stories in recent memory, with the stock having grown more than 15-fold since its IPO less than 10 months ago. In this fool live Video clip, recorded on September 20, Fool.com contributors Matt Frankel, CFP and Jason Hall discuss Upstart’s biggest growth opportunity and some important risk factors investors should keep in mind.
Matt Frankel: Yes, the auto loan industry is so untapped because, as you mentioned, the subprime auto loan market is very predatory. It is not uncommon for a subprime borrower to get an interest rate of 20% or more on secured loans.
Jason Hall: On guaranteed assets. On secured loans.
Frankel: Right now, Upstart is prioritizing refinancing auto loans to try and get some of those borrowers to pay more down-to-earth interest rates. Something like 80% of borrowers have never defaulted on a loan, but less than 50% can get the best interest rates from most banks. It’s a big gap there, and it really just creates an opportunity. There is $ 1.3 trillion in existing auto debt and about $ 0.5 trillion that is created each year. And a good deal of that is from subprime borrowers who can’t qualify for the best credit scores.
If Upstart can do this better, the loan volumes you see across the platform are now mostly personal loans at this point. The auto loan is still a very small piece of the pie. Even if they really go head-first, they just ramp up. It could go up a lot from here. But as you mentioned, the rating gets high at this point. I think it’s an IPO in December, the IPO price was $ 20. It is now trading for just under $ 300.
Room: Yes. It’s about a $ 23 billion business at this point, which a lot of people often do.
Frankel: I would have liked to participate in the IPO.
Frankel: But that’s the price for a lot of future growth at this point, which I can understand as I can argue for that, not being quite my number one.
Room: Two quick points before we reach our last, so we’ll have plenty of time to reach some of those individual rankings that we want to talk about. I think it’s worth pointing out that when it comes to the actual quality of the platform, the quality of their technology is at risk.
We won’t know until the next business cycle. We are in the midst of a strong economic recovery, a strong job market. There are more jobs open than there are unemployed people looking for a job. Until we’re really in a hurry to get into a recession, I think it’s going to be difficult to really assess how original they are, how well their AI is able to identify really the risks? Remember, you bet on this, everyone is borrowing right now and no one is in default. We don’t really quite know. I think this is the number one thing you need to remember.
Number two is what they do they call owner, is that really going to prove our ownership? Because I promise you, there are a lot of dogs in this fight who see what they’re doing and say, “Okay, we’ve got to take action.” I think we’ll find out what the competitive nature and value of their intellectual property is.
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