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The artificial intelligence (AI) boom unofficially started in January 2023, after OpenAI's ChatGPT amassed 100 million users faster than any software application in history. It achieved the milestone in just two months, sparking a race among the world's largest tech companies to develop their own AI models.
But some companies were successfully deploying AI long before ChatGPT. Upstart Holdings (NASDAQ: UPST) has been using the technology to evaluate the creditworthiness of potential borrowers for over a decade, and in many cases, its models now outperform traditional assessment methods that still rely on Fair Isaac's FICO credit scoring system.
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Upstart stock has declined by 50% this year (as of the market close on Nov. 6), despite the company's blistering growth. Investors are worried that rising interest rates will reduce demand for credit, and they might be right in the short term, but here's why I predict Upstart stock will double over the next 12 months.
Upstart's AI algorithm considers more than 2,500 data points to determine the creditworthiness of a potential borrower, and it can do so in real time to deliver fast decisions. A human assessor would need days or even weeks to analyze the same amount of data.
Upstart's underwriting models constantly learn and improve over time, and in the third quarter of 2026 (ended Sept. 30), the company said they were 2.77 times as accurate as traditional assessment methods -- a record high. This means borrowers can expect an interest rate that appropriately reflects their ability to repay their loan, while Upstart's funding partners can expect modest returns with minimal unforeseen risks.
Upstart approved a record 574,089 loans during the third quarter, and they had a total dollar value of $4.1 billion which was up 44% from the year-ago period. The company said it could have grown even faster if not for macroeconomic headwinds, but more on that in a moment.
The bulk of Upstart's originations were for unsecured personal loans, but its secured categories grew rapidly. The dollar value of home equity line of credit (HELOC) originations more than doubled year over year, while automotive loans more than tripled.
But Upstart has barely scratched the surface of its long-term opportunity. Chairman Dave Girouard believes AI will replace all human-driven loan assessment methods within the next decade, leaving $25 trillion in annual global originations and $1 trillion in fee revenue up for grabs for the companies leading the transition.
Upstart normally doesn't use its own money to write loans, except for testing purposes. The majority of its revenue comes from fees for originating loans on behalf of banks and other funding partners. The company generated $365 million in total revenue during the third quarter, up 34% from the year-ago period.
Chief executive Paul Gu said the result could have been even stronger, but the company took a more cautious approach to underwriting new loans because of the challenging macroeconomic environment. He noted that inflation is outpacing wage growth, causing a growing number of American consumers to fall behind on at least one of their credit obligations.
As a result, management reduced its 2026 revenue guidance by $50 million to $1.35 billion. However, it would still be a record result, and an impressive 35% increase compared to 2025.
On a more positive note, Upstart continued to make strides at the bottom line in the third quarter. Its generally accepted accounting principles (GAAP) net income came in at $36.6 million, a 15% jump from the year-ago period.
Moreover, Upstart's preferred measure of profitability is adjusted (non-GAAP) earnings before interest, tax, depreciation, and amortization (EBITDA), which excludes one-off and non-cash expenses like stock-based compensation. It came in at $89.3 million, up 25%.
Upstart's valuation is a big reason why I think its stock could double over the next year. It's trading at a price-to-sales (P/S) ratio of just 1.8 as I write this, a considerable discount to its three-year average of 5.3.
Further, Wall Street thinks the company could grow its revenue to $1.8 billion in 2027 (according to Yahoo! Finance), placing its stock at a forward P/S ratio of just 1.2.
That suggests Upstart stock will have to explode higher by 341% before the end of next year just to trade in line with its three-year average P/S ratio. I'm not predicting a gain of that magnitude because elevated interest rates could weigh on credit demand for the foreseeable future, but it's possible we're at the tail end of this hiking cycle.
According to the CME Group's FedWatch tool, which calculates the probability of changes in interest rates based on the 30-day Fed Funds Futures market, Wall Street is anticipating a hike in December, and then just one more hike for the whole of 2027. If that's the case, I think credit demand will stabilize next year, taking the pressure off Upstart's operating results.
Plus, it's worth remembering that Upstart successfully navigated the last rate-hiking cycle in 2022 and 2023 and emerged stronger than ever. I don't think this time will be any different, so I feel confident that its stock can at least double over the next 12 months.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group and Upstart. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.
Prediction: This Under-the-Radar Artificial Intelligence (AI) Stock Is Going to Double Over the Next 12 Months was originally published by The Motley Fool
