Upstart Stock: Buy, Sell, or Hold?

Upstart Holdings Inc. (UPST)) is a cloud-based AI lending network that works with banks to provide personal loans. Upstart is transforming the credit industry using AI. To assess a potential borrower’s creditworthiness, Upstart has created an income and default prediction model, resulting in lower loss rates for Upstart-powered banks. In addition to income, FICO score, and credit report, the prediction model considers non-traditional variables such as education, area of study, GPA, and work history to assess the borrower’s ability to repay the loan. According to the results of the access to credit comparison by Upstart, the tested Upstart model approves 26% more borrowers than the conventional model and has 10% lower average APRs for authorized loans.

Upstart Holdings reported fiscal first-quarter earnings on May 12, beating Wall Street estimates. The company reported adjusted earnings of $0.22 per share beating the consensus estimate of 15 cents per share. Upstart stock gained 17% in after-hours trading following the earnings report as a result of solid Q1 performance and positive full-year guidance.

First-quarter earnings recap

The reported revenue for the first quarter was $121.3 million, up 90% year-over-year and 40% quarter-over-quarter. Despite lower consumer loan demand due to government stimulus, Upstart-powered banks approved nearly 170,000 loans in Q1 generating $160 million revenue from fees. Adjusted EBITDA was $21 million in Q1, up from $3.7 million in Q120 and net income was recorded at $10.1 million. Operating expenses were $105.8 million, investment in engineering and R&D was $19 million, and G&A spending was recorded at $20 million.

Exhibit 1: Revenue

Source: Investor presentation

Further, in Q1, the company released a new and revised version of its credit decisioning AI model to deliver a more accurate risk assessment of potential borrowers. Upstart also enhanced the automation of income verification and revised the verification model with more refined fraud signaling. More than 70% of approved loans in Q1 were fully automated. On the other hand, the company acquired Prodigy Software, Inc., intending to expand its dealership footprint. This deal will broaden Upstart’s AI-enabled lending to include auto loans as well.

Commenting on the stellar financial performance and the company’s business model, Upstart Holdings CEO Dave Girouard said:

AI lending is a transformational opportunity to create a better product for consumers and for banks, and Upstart has become synonymous with this exciting new category. Upstart is delivering a combination of growth and profits that is rare in FinTech and the technology industry overall.”

The company remains well on track to benefit from the expected growth in adoption of AI technology, and its first-mover advantages are likely to come in handy in the next few years enabling Upstart to grow earnings consistently.

Industry outlook

According to International Data Corporation (IDC), worldwide revenue for the AI market, including software, hardware, and services, will increase 16.4% year-over-year in 2021 to $327.5 billion. AI applications accounted for 50% of revenue in the AI software category in 2020. The AI Software Platforms market is expected to grow at a faster pace, at a 5-year CAGR of 32.7%. The AI services category is forecast to reach $37.9 billion by 2024 and is expected to outperform the overall AI market by approximately 1% in 2021. A major factor driving AI market growth is the prevention of fraud and malicious attacks.

Exhibit 2: Worldwide AI software industry growth projections, 2020-2024

Source: IDC

Ritu Jyoti, Vice President of AI Research at IDC said:

 “AI is becoming ubiquitous across all the functional areas of a business. Advancements in Machine Learning, Conversational AI, and Computer Vision AI are at the forefront of AI software innovations, architecting converged business and IT process optimizations, predictions and recommendations, and enabling transformative customer and employee experiences.

With AI becoming a game-changing technology for every business, it is also influencing the credit and finance industry as well. Fintech has grown explosively over the last few years along with the growth of concepts such as the Internet of Things. Data from Statista highlight that in February 2021, there were 10,605 Fintech startups in the U.S, 9,311 startups in EMEA, and 6,129 startups in the Asia-Pacific region.

Exhibit 3: Number of Fintech startups worldwide from 2018 to February 2021, by region

Source: Statista

The Fintech market’s largest segment will be Digital Payments with a total transaction value of $6.6 billion in 2021. A recent study shows that nearly 78% of the millennial population in the United States will use digital banking by 2022. According to a report from IHS Markit, the business value of AI in North American banking is expected to reach $79.0 billion in 2030.

All these data highlights that AI and fintech will become a major part of the financial services industry in the next few years.


Upstart went public with an initial public offering (IPO) in December 2020, and its stock has soared ever since. Although Upstart stock is trading at very high valuation multiples today, the favorable macroeconomic outlook and the company’s unique position in the financial services industry suggest the company will be one of the fastest-growing financial services companies in the next decade. For this reason, growth investors with an above-average risk tolerance might find Upstart stock a good buy even at these elevated prices.

Disclosure: The author does not own any shares mentioned in this article.

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