Shares of Upstart (UPST -2.07%) soared last week after the company smashed estimates in its fourth-quarter earnings report, and executed across the board.
The company’s new artificial intelligence (AI) models and partnerships have driven a surge in loan origination volume on the Upstart platform, which uses the technology to determine borrowers’ creditworthiness. Loan volume surged even as interest rates remained elevated, and it delivered growth in all key product categories, including emerging ones like home equity lines of credit (HELOCs).
Upstart stock jumped more than 30% on Feb. 12 even as the broad market pulled back on a higher-than-expected inflation reading for January, news that would have typically pushed Upstart stock down as well.
Let’s take a quick look at the numbers, and then explore why the stock can continue to move higher.
A look at the numbers
Upstart’s loan transaction volume jumped 68% to $2.1 billion, driving revenue up 56% to $219 million, which was well ahead of the average estimate at $181.9 million. Total fee revenue was up 30% to $199 million, indicating strong, if slower, underlying growth.
On the bottom line, the company narrowed its generally accepted accounting principles (GAAP) net loss to $2.8 million from $42.4 million in the quarter a year earlier. Its adjusted earnings per share improved from a loss of $0.11 to a profit of $0.26, easily beating estimates of a per-share loss of $0.04.
Upstart’s forecasts also sugested that the momentum will continue into 2025, as it expects revenue of about $1 billion, or an increase of more than 50% from 2024, and its GAAP net income will be at least breakeven.
Here are a few more reasons the company appears to be entering a new growth era.
Image source: Getty Images.
It’s the clear leader in AI fintech
Upstart is a consumer lending platform, but it differentiates itself from alternatives with its emphasis on technology. It uses a proprietary AI lending model that it says is significantly more effective than conventional FICO scores for approving borrowers’ loan applications. It’s also able to approve more borrowers at a lower default rate.
The tech advantage is finally becoming clear for investors. Indeed, 91% of its loans were approved by automated systems, and its most recent model, Model 18, increased loan origination dollars by more than 15% with the same credit quality in the fourth quarter. That’s a significant difference, and it’s driven by AI.
Upstart says its model approves 101% more applicants than traditional lending models, and offers APRs (annual percentage rates) that are 38% lower than traditional lenders.
On the earnings call, Chief Executive Officer Dave Girouard said, “Upstart is building the foundation model for credit. Nobody else is even trying.” That shows how the company is separating itself from the pack and, Girouard added, defending AI’s cost-saving abilities in lending. “AI-enabled lending,” he said, “is undeniably a winner for the American family.”
In May, the company is hosting an AI Day for investors and analysts, detailing its technology, its business model, and the opportunity in front of it. That event could be another catalyst for the stock to move higher.
The opportunity is huge
Upstart has a huge addressable market, estimating it at $3 trillion in loan originations, including personal, auto, home, and small businesses. Personal loans, where Upstart has historically played a large role, represent a small fraction of that at $155 billion, meaning that the company has a lot of market space to grow into.
Additionally, there are other opportunities to monetize its technology beyond just originating loans with the help of its funding partners. One potentially large revenue stream would be licensing its technology. The company had done licensing deals in the past, but as its technology gets more accurate and its performance improves against the FICO score, it should become more valuable to banks and other potential licensors.
Like other AI models, Upstart also expects its algorithms to get better as it gets bigger, since it now has more data to train on. That should reinforce its competitive advantage and create a flywheel effect, helping it attract more lending partners and reach more consumers.
Upstart tracks macro factors closely, and its proprietary Upstart Macro Index fell during much of 2024, down 7% in the fourth quarter. That signals that the lending environment should provide a tailwind for the company in 2025, at least compared to 2024.
That, combined with its improving technology, expansion in new categories, and increasing conversion rates, mean Upstart could be a big winner in 2025. At a market cap of just $8 billion, there’s still a lot of upside potential for the AI disruptor.
