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Thursday, June 1, 2023

Why AI Online Credit Leader Upstart Holdings Inc (NASDAQ: UPST) is Rising Fast (More on Castlelake Investment)

Upstart Holdings Inc (NASDAQ: UPST) continues to move steadily northbound rocketing up another 10% on Wednesday to highs over $22 per share. UPST has a storied history on the Nasdaq; after going public at $20 per share in December 2020 the stock skyrocketed in summer 2021 to over $400 per share but collapsed in the fall and leading into 2022 as the credit markets tightened up and investors grew concerned that Upstart’s AI models weren’t battle tested in the kind of difficult economic environment. After well over a year of declines UPST recently reversed off $11.93 and has been running northbound with power since. Recently, Castlelake, a global alternative investment manager with $20 billion under management, together with a co-investor and minority partner Eltura Capital Management, reached an agreement to purchase up to $4 billion of consumer installment loans from Upstart.  

UPST currently has an enormous short position over 25 million shares short or about 40% of the public float making UPST a leading short squeeze candidate. While shorting UPST was a winning strategy for the past year, the tides have turned now that UPST has reversed off all-time lows, trades at a tiny fraction of its previous highs and has an enormous investors base that continues to accumulate. Things are looking up as Upstart positions itself to succeed when the economy does improve. The Company has also dramatically advanced its technology including faster AI model development, more training data, and a strengthened leadership team. Upstart is on an important journey to reinvent credit so that it works for everyone. Another positive development for Upstart is the recent move into the $2.7 trillion per year home loan market substantially increasing the Company’s revenues while diversifying its business. We will be updating on UPST when more details emerge so make sure you are subscribed to newsytrends.com by entering your email below.

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Upstart Holdings Inc (NASDAQ: UPST) is the leading artificial intelligence (AI) lending marketplace designed to improve access to affordable credit while reducing the risk and costs of lending for its bank partners operating from upstart.com. By leveraging Upstart’s AI marketplace, Upstart-powered banks can offer higher approval rates and experience lower default rates*, while simultaneously delivering the exceptional digital-first lending experience their customers demand. By using AI, Upstart analyzes thousands of data points on a potential borrower as opposed to just the handful FICO considers. And because AI can process huge volumes of data quickly, 84% of approvals are automated and happen instantly.  Upstart has 2.7 billion customers, has originated $33 billion in loans through close to 100 banks.  

Upstart leverages the power of AI to more accurately quantify the true risk of a loan. The Company’s AI models have been continuously upgraded, trained and refined for more than nine years. Upstart has discrete AI models that target fee optimization, income and identity fraud, acquisition targeting, loan stacking, prepayment prediction, and time-delimited default prediction. The Company’s models incorporate more than 1,500 variables and benefit from a rapidly growing training dataset that currently contains more than 44.4 million repayment events. The flywheel effects generated by our constantly improving AI models provide a significant competitive advantage—more training data generally leads to higher approval rates and lower interest rates with better returns to lending partners. 

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On Monday Castlelake, L.P., a global alternative investment manager together with a co-investor and minority partner Eltura Capital Management reached an agreement to purchase up to $4 billion of consumer installment loans from Upstart. The purchase agreement consists of the acquisition of a back book of loans and a forward flow arrangement. The transaction is a recent example of Castlelake’s participation in the consumer credit and specialty finance sector, where it has both acquired assets and provided asset-based private credit. Other recent transactions include a £100 million facility commitment for a fintech company focused on expanding its revenue-based financing solution, and an agreement to provide credit to a tech-enabled trade financing platform built for small and medium-sized businesses. 

Upstart says the loans it originates experience 53% fewer defaults at the same approval rate compared to large U.S. banks. Additionally, it approves a whopping 173% more loans at the same default rate. Curiously, while investors were sending Upstart stock crashing last year, banks, credit unions, and car dealers were lining up to adopt the company’s AI technology. That momentum continued in Q1, with the company reporting 99 lending partners on board, nearly double the 50 it had a year ago. Most recently Upstart Auto Retail was selected by Mercedes-Benz as an approved digital retail provider for their dealerships. Upstart’s innovative car-buying software is now available to Mercedes-Benz dealers and their customers across the U.S. Mercedes-Benz is the ninth OEM to name Upstart Auto Retail as an approved digital retail provider, after Acura, Honda, Kia, Lexus, Mitsubishi, Subaru of America, Toyota, and Volkswagen. 

On May 9 Upstart reported financial results for its first quarter of fiscal year 2023 ended March 31, 2023. Revenue. Total revenue was $103 million, a decrease of 67% from the first quarter of 2022. Total fee revenue was $117 million, a decrease of 63% year-over-year. 

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I’m pleased with the progress we made in Q1 against the objectives I set out last quarter,” said Dave Girouard, co-founder and CEO of Upstart. “Despite the headwinds facing our industry, we secured multiple long-term funding agreements, together expected to deliver more than $2 billion to the Upstart platform over the next 12 months.”  We will be updating on UPST when more details emerge so make sure you are subscribed to newsytrends.com by entering your email below.

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Disclosure: we hold no position in UPST either long or short and we have not been compensated for this article.

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