$Upstart Holdings, Inc.(UPST)$ surged 25% after earnings, driven by strong revenue and EBITDA growth. Against the backdrop of an across-the-board beat in this earnings report, management provided an optimistic outlook, projecting 2025 revenue to reach $1 billion and aiming to break even.
Financial Highlights:
Revenue: $219M vs. $180M, beating by 20%
EPS: $0.26 vs. -$0.03, beating by 870%
Adjusted EBITDA: $38.78M vs. $6.16M, beating by 529%
Loan origination volume grew 33%, and revenue increased 35%
Data from Bloomberg and Upstart earnings
Investment Takeaways:
AI Model Driving Higher Conversion and Loan Volume
91% of loans fully automated, and 93% of instant approvals converted into funded loans
Rate Cuts in 2024 Boosted Borrower Demand, but 2025 Rate Cut Expectations Remain Uncertain
Contribution Margin Remains Flat, Not Keeping Up with Revenue Growth
Management Expects to Break Even in 2025, Raising Profitability Expectations
AI Model Optimization and Rate Cut Expectations Driving Borrower Demand
The approval rate (conversion rate) continuously increased, reaching 19.3% this quarter, driven by AI model improvements. Meanwhile, loan origination volume has been steadily rising since Q1 2024, in contrast to other metrics that peaked in Q2 2023 before declining.
Data from Bloomberg and Upstart earnings
During the earnings call, management attributed the conversion rate improvement to AI model enhancements:
"By continuously improving AI model accuracy, loan approvals and conversion rates have significantly increased. Greater automation has further driven conversion improvements, enhancing efficiency and the borrower experience."
Additionally, last fall’s rate cuts positively impacted borrower demand, leading to lower APRs on the platform, making loans more attractive and driving higher demand.
Upstart also announced its “Upstart AI Day” event, scheduled for May 14.
Rapid Growth, But Profitability Remains Unstable
For full-year 2025, Upstart expects GAAP net income to be at least breakeven.
While loan volume is increasing, contribution margin has remained flat over the past two quarters, yet to return to its 67% peak in Q2 2023.
Data from Bloomberg and Upstart earnings
Bloomberg analysts forecast Q1 2025 contribution profit at $108M, lower than Q4’s $122M. If the company maintains the current contribution profit and margin proportion, next quarter’s margin may decline.
Additionally, while EBITDA growth and beats have been achieved over the past two quarters, EBITDA was unstable in 2023-2024. After peaking in Q2 2023, revenue and profits fell sharply due to prolonged rate hikes.
Data from Bloomberg and Upstart earnings
With potential rate cuts in 2025, loan growth and profitability remain under pressure. Tonight’s CPI data will provide further guidance on Fed rate cut expectations.
Furthermore, higher conversion rates and loan origination volumes mean that if the macroeconomic environment deteriorates, the percentage of borrowers unable to repay loans may increase.
Conclusion
Upstart’s strong Q4 earnings beat and optimistic 2025 profitability guidance have fueled its significant rally. While the short-term uptrend may continue, investors should closely monitor profitability trends in the next earnings report.
Not financial advice.
As a stock market beginner, I bought Upstart's stock and April $90 call options in my demo account before the earnings release to test my investment thesis.
Due to the uncertain profitability outlook and uncertainty around the Fed's rate cut expectations, I do not plan to buy such growth stocks in my real account. However, if next quarter's earnings trend stabilizes, I will consider buying.
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