Would you expect low or high returns

Reference no: EM133551397

Question: Upstart is a tech company that uses a proprietary AI algorithm to determine a person's true risk of defaulting on a loan. Traditionally, credit unions such as TransUnion, Experian and Equifax are used to give a credit rating, such as 600 or 700 and so forth. These numbers erroneously exclude a tremendous number of people from the loan market which is financial discrimination. Some people have a low credit score because they never had a lease, mortgage, car loan, and don't have a high income, but they are unlikely to default and can never get out of this financial rut. This hurts the economy, the individual, and banks' profitability in lost opportunity for earning interest on low risk loans. Upstart claims that their AI algorithm will allow billions of dollars to be loaned without any increase in risk. The company went public in December 2020 and they are already realizing a profit. However, they are a very young company and it's not clear if large banks will welcome Upstart's algorithm, or if this is a just another tech fad that analysts are in love with for the moment.

Given this background of the company, let's look at the most recent quarterly report

(the 2021 annual report doesn't come out for another week). Specifically, please use the numbers that refer to 9 months ending Sept 30, 2021 (some of the statements also report 3 months ending Sept 30,2021)

1. Use the balance sheet and statement of operations (income statement) to calculate the following profitability metrics:

a. ROE
b. ROA
c. ROC
2. Now let's calculate some liquidity ratios

a. Current ratio
b. Cash ratio - using only "cash" (the company doesn't seem to report marketable securities so let's exclude this)
3. Finally, using a share price of $105, and outstanding shares of 81.96 million, calculate the following

a. Market value
b. Market value added
c. Market to book value
Do you find the answers from question 3 are disproportionate to the answers from question 1?

What does this tell you about how the market views Upstart?

Considering these answers, would you invest in Upstart, and would you consider this low or high risk, and would you expect low or high returns with a 3-5 year horizon?

Reference no: EM133551397

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