Upstart Holdings, Inc. (UPST) was built on a simple yet revolutionary idea: What if advanced AI could assess creditworthiness better than traditional credit scores? That’s the core belief driving Upstart, now a leading AI-powered lending marketplace. Since its founding in 2012, UPST has connected millions of consumers with over 100 banks and credit unions. Their platform offers a range of products, including personal loans, auto refinancing, home equity lines of credit (HELOCs), and small-dollar loans.
The company was a market darling in 2020 and 2021, thanks to low interest rates and a strong demand for consumer lending. In 2021, the company’s revenue was up 264% year-over-year, with a net income of $135.44 million. The stock hit an all-time high of $390 in October 2021. However, as interest rates began to rise, demand for its services dropped, turning those profits into losses over the past two years.
Despite this downturn, Upstart is leveraging its AI capabilities to stay at the forefront of fintech innovation. Its AI model analyzes 1,600 variables to provide a more nuanced view of creditworthiness, offering a competitive edge in loan approvals while managing default risks. That's a winning combination because it could translate into higher revenue and profits.
In recent years, Upstart has expanded its network of lending partners and ventured into new loan products. Though 2022 was challenging due to cautious investor behavior, the company’s AI-driven approach remains strong, with recent loan originations reflecting solid growth.
While the road ahead may be challenging, there are signs that the worst is behind Upstart. Revenue has hit a low and is beginning to climb again, and cost-cutting measures have helped stabilize losses. Analysts are optimistic, forecasting a 10.9% year-over-year increase in revenue to $149.23 million, with further growth of 10.5% and 27.3% expected for fiscal years 2024 and 2025, respectively.
Navigating Financial Waters With AI-Driven Precision
Building on its AI-driven approach, UPST recently reported its financial results for the second quarter of 2024, revealing signs of sequential growth and a clear path toward EBITDA profitability. Central to this progress is the launch of the company's new credit pricing model, M18. This innovative model integrates the Annual Percentage Rate (APR) as a key feature, which is not typically seen in traditional risk models. By generating about 1 million predictions for each applicant (six times more than its previous model), M18 aims to fine-tune accuracy and enhance the loan approval process.
On the financial side, the company’s revenue amounted to $127.63 million in the quarter that ended June 2024, beating analysts' estimates of $124.53 million. For the first half of 2024, its revenue increased 7% year-over-year to $255.42 million, while total fee revenue grew 3% to $268.60 million. Moreover, UPST saw a 31% increase in loan transactions, reaching about 144,000 loans and welcoming over 89,000 new borrowers.
During its earnings call, management proudly shared that 91% of their core unsecured loans in Q2 were fully automated, which means no documents, phone calls, or human involvement is required. This automation rate was 73% just two years ago, and hitting 90% seemed out of reach. However, thanks to AI, they’ve not only achieved it but also kept fraud at bay, solidifying Upstart’s position as a leader in AI-driven lending.
Looking ahead, the company is optimistic. It forecasts $150 million in revenue for Q3 2024 and expects to achieve positive adjusted EBITDA in Q4. Moreover, it expects a fee revenue of $320 million for the second half of the year. With its innovative AI solutions and expanding product offerings, Upstart is well-positioned for continued growth in the evolving lending landscape.
Bottom Line
As Upstart continues to innovate with new AI-driven models like Model 18, it's clear that the future of lending is becoming more intelligent, accessible, and tailored to individual needs. The company’s efforts to integrate AI into every facet of its operations reshape the financial landscape, making credit more inclusive and efficiently managed.
Investors should recognize that the technology driving Upstart is more than just a trend; it’s a powerful tool with the potential to reshape a trillion-dollar market. With lending being such a crucial part of the economy, Upstart’s relatively modest market cap of $3.06 billion leaves room for significant growth if its technology continues to prove itself.
Despite some bumps in the road, the company's increase in loan volume and its anticipated positive EBITDA by the fourth quarter demonstrate a resilient and forward-looking business model. Its focus on refining technology and balancing growth with responsible management positions Upstart as a leader in the AI-driven transformation of the credit industry.
As the market’s perception shifts and conditions become more favorable, this could be a pivotal moment for investors to consider investing in UPST, especially as the company looks poised to return to a path of growth and success.
