Investors came in to Upstart‘s (UPST 5.53%) first-quarter earnings report hoping the company would maintain its momentum from the end of last year.
Its growth has accelerated thanks to a new artificial intelligence (AI) model, Model 18 or M18, that has significantly improved its conversion rate thanks to an even broader prediction set that includes approximately 1 million predictions per applicant, or six times its prior model.
With those tailwinds behind it, Upstart’s results in Q1 did not disappoint. Revenue jumped 67% to $213.4 million, which topped estimates at $201.3 million. Those results included 34% growth in revenue from fees to $185.5 million, and Upstart benefited from a decline in fair value adjustments on its loans, indicating better credit performance.
Underlying growth in its business was especially impressive as loan originations rose 102% to 240,706 loans, and total originations jumped 89% to more than $2.1 billion. The conversion rate continued to improve, rising from 14% to 19.1%, all signs that adoption is growing rapidly.
Its metrics on the bottom line also improved. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved from a loss of $20.3 million to a profit of $42.6 million. It nearly reported a generally accepted accounting principles (GAAP) profit, finishing the quarter with a loss of $2.4 million, up from a loss of $64.6 million in the quarter a year ago.
It reported an adjusted per-share profit of $0.30, ahead of the consensus at $0.17, and up from an adjusted per-share loss of $0.31 in the quarter a year ago.
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Why was Upstart down?
Despite the strong Q1 earnings report, Upstart essentially reiterated its full-year guidance untouched as it guided to revenue of $225 million for Q2, below the consensus at $226.3 million.
Wall Street tends to see a beat without a raise as a sign that the current momentum won’t last, and investors sometimes punish growth stocks for that pattern. As a result, the stock was down 16% in after-hours trading on Tuesday.
While management did acknowledge the uncertainty in the economy, there wasn’t anything in the guidance to indicate weakness. Meanwhile, a number of indicators in the business showed it continuing to strengthen.
Upstart is moving in the right direction
Upstart has diversified its business away from unsecured consumer loans in recent years as auto loans grew by five times to $61 million in the quarter and up 42% from Q4. Home loan origination jumped six times to $41 million, and management noted on the earnings call that its lending partners greatly prefer secured loans to unsecured loans, which bodes well for continued growth in the business.
Prior to the earnings release, the company announced a one-year strategic partnership with OnePay, a fintech majority owned by Walmart. Upstart said the partnership would help it market lending product to Walmart’s customer base, a massive opportunity for the company. It also plans to offer co-branded products without OnePay, though it said it didn’t expect the partnership to have a material impact on financial results this year.
Additionally, Upstart announced a forward-flow commitment from Fortress Investment Group, which agreed to purchase up to $1.2 billion in loans originated on Upstart, which will further diversify the company’s base of lending partners and help ensure adequate funding for its loans.
Why Upstart’s a buy
If the after-hours sell-off holds, Upstart now trades at a forward price-to-earnings (P/E) ratio of just 31 based on adjusted earnings, and that number is likely to fall as analysts up their forecasts following the strong quarter.
Meanwhile, Upstart’s revenue growth and the tailwinds in the large auto and home loan markets show it still has a significant growth runway in front of it.
Upstart’s own proprietary data even shows the macroenvironment improving modestly, and the business is less at risk of turmoil in the credit market than it was in 2022 when interest rates surged, freezing borrower demand. With interest rates already high and Upstart’s business now resilient, the company seems to be in good shape no matter what happens on the macrofront.
A recession could even be a positive for the company as it could lower interest rates.
Overall, Upstart’s business is getting stronger, its technology is improving, and the valuation looks attractive. The company also has scheduled an “AI day” when it will present technology updates and discuss its business model and strategy.