This AI-focused fintech seems to have some tailwinds.
Upstart (NASDAQ:UPST) stock was having one of its best days in years on Friday as shares skyrocketed more than 41% after the AI-fueled fintech released third quarter earnings.
Upstart’s huge spike was a result of strong earnings that beat expectations, a robust outlook, and some macroeconomic tailwinds that could provide future growth for the company.
As of late morning, Upstart stock had risen to about $78 per share, a 41% surge since the market closed on Thursday. Year-to-date, Upstart stock is now up about 91%.
Back in growth mode
If you know the short, volatile history of Upstart, you know it was fintech darling that ballooned to over $400 per share during the tech boom of 2021 then crashed hard 2022 and early 2023, falling to a low of around $11 per share in May of 2023 after the banking crisis.
Since then, Upstart has been steadily climbed back, fueled by Friday’s ridiculous 41% run up.
When Upstart rose in 2020 and 2021, it was caught up in the euphoria of the rising tech market and investors were intrigued by its technology platform whereby it uses AI to handle loan requests, with its clients being banks and financial institutions. But it really had no earnings to speak of.
But now, having survived the banking crisis of 2023 and the strain that high interest rates put on its business, it seems to be in a much better place.
The Q3 results bear that out, as Upstart saw revenue climb 20% in the quarter to $162 million, which surpassed estimates of $149 million.
The company still had a net loss, but it was only $6.8 million, down from $40.3 million in the same quarter a year ago. Also, it had earnings per share of -6 cents, which was better than the -15 cents EPS that had been projected.
Also, 188,149 loans originated on its platform, totaling $1.6 billion. That’s up 30% from the same quarter last year, and 43% higher than Q2 of 2024. Further, the conversion rate on loan requests was 16.3% in Q3, up from 9.5% in the same quarter a year ago.
“With 43% sequential growth in lending volume and a return to positive adjusted EBITDA, we continue to strengthen Upstart’s position as the fintech leader in artificial intelligence,” Dave Girouard, co-founder and CEO of Upstart, said. “Even without a significant boost from the macroeconomy, we’re back in growth mode.”
Some tailwinds are blowing
While the earnings were strong, Upstart also got a significant push from the macroeconomic environment. Most notably, on Thursday, the Federal Reserve lowered interest rates another 25 basis points down to the 4.50% to 4.75% range.
On top of the 50 bp decline in September, rates are now down 75 bps from their highs, and they are expected to continue to move lower over the next couple of years. This is fantastic news for Upstart, as lower rates will lead to increased borrowing, and more revenue for Upstart as it makes money from fees based on loan activity on its platform. As it is not a typical lender itself, it does not generate much interest income, but it also doesn’t have the same level of credit risk.
In addition, consumer confidence is up, inflation is down, and the economy grew at a 2.8% clip last quarter, so the improving economic environment should also boost loan activity.
Election impact
Further, the election of Donald Trump as president is largely viewed as good for the banking industry, as it could lead to less regulation and spur growth. Bank stocks have been soaring since the election, so growth in the banking industry is good for Upstart.
Additionally, Upstart reported that more than half of its loans on its platform are from long-term committed partners, including Blue Owl Capital, whose affiliate, Atalaya, will purchase up to $2 billion in loans from the Upstart platform over the next 18 months. This lends more stability to Upstart’s revenue streams, as it had previously been top heavy.
Upstart also has a good outlook, as it expects revenue of $180 million in the quarter, a sequential gain of 11%, which is much higher than the $162 million that was anticipated. It also expects adjusted EBITDA of $5 million, up from $1.4 million last quarter.
Upstart got a slew of analysts upgrades and should soon be profitable, based on the tailwinds. But its valuation, especially after this huge surge today, should be watched. Long-term its an improving story, but just keep an eye on the valuation.
