The Fintech Stock That Could Disrupt the Credit-Scoring Business Over the Next Decade

For decades, credit bureaus Equifax (NYSE: EFX), Experian (OTC: EXPGY), and TransUnion (NYSE: TRU) dominated the industry they largely shaped. There was no room or reason for another player.

As has been the case for so many other businesses, time and technology are changing this one. A relatively young outfit appropriately called Upstart (NASDAQ: UPST) is disrupting the credit-scoring industry in a way that TransUnion, Experian, and Equifax arguably should have when they had the chance.

Image source: Getty Images.

What's Upstart?

Simply put, Upstart uses artificial intelligence to determine an individual's true creditworthiness. It's not that the usual factors like income, payment history, and existing debts don't play a role in Upstart's assessments. But this company's platform considers more than 2,500 variables about a potential borrower.

The end result is a much more accurate picture of that person's likelihood of repaying a loan. This approach ultimately allows for 43% more approvals without any additional defaults. That's why it's been particularly well received by automobile dealers, although it can facilitate most kinds of lending, including home equity loans.

And lenders and dealers that try it end up loving it. Since its launch in 2012 through the end of last year, Upstart originated over 5 million loans worth a total of more than $50 billion through over 100 lending partners. Nearly 1.5 million of those loans worth $11 billion materialized just last year.

Over the hump and still going

If you know much about the domestic lending market, you know those numbers aren't all that big. The Federal Reserve reports that American households collectively owed $18.8 trillion as of the end of last year, $1.7 trillion of which is automobile loans, with more than another $400 billion of that being home equity loans.

For investors, however, it's not about a company's current size compared to its competitors. It's about the business's trajectory. Upstart's clearly on the right one. Last year's total loan originations were up 115% year over year, driving revenue 64% higher to $1 billion.

Arguably more important, Upstart is finally reaching enough critical mass to produce sustained, meaningful profits. Last year's net income rolled in at just over $54 million, reversing 2024's loss of $128 million.

This year's top- and bottom-line growth is likely to look slower, partly because the year-over-year comparisons are getting tougher, and partly because economic headwinds are starting to blow. The company is now firmly profitable though, and increasingly so. And priced at less than 10 times next year's anticipated per-share profit of around $3.20, there's clearly room for the stock to make gains between now and then.

A bullish edge

The big three credit bureaus are pushing back, of course. For instance, Equifax offers AI-powered OneScore, offering automation and self-service features similar to Upstart's technology.

Upstart has a significant head-start on all of these competing offerings though, plus the advantage of being built from the ground up to do exactly what it's doing now the way it's doing it. Experian, TransUnion, and Equifax, meanwhile, are still nursing legacy businesses that are decreasingly relevant in this modern era.

This of course makes UPST stock a compelling growth pick, particularly after its pullback since the middle of last year.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Equifax and Upstart. The Motley Fool recommends Experian Plc. The Motley Fool has a disclosure policy.