AI lending platform Upstart (NASDAQ:UPST) missed analysts' expectations in Q3 FY2023, with revenue down 16.1% year on year to $134.6 million. Next quarter's revenue guidance of $135 million fell short, coming in 14.3% below analysts' estimates. Turning to EPS, Upstart made a GAAP loss of $0.48 per share, improving from its loss of $0.69 per share in the same quarter last year.
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Upstart (UPST) Q3 FY2023 Highlights:
- Revenue: $134.6 million vs analyst estimates of $139.7 million (3.7% miss)
- EPS (non-GAAP): -$0.05 vs analyst estimates of -$0.02 (-$0.03 miss)
- Revenue Guidance for Q4 2023 is $135 million at the midpoint, below analyst estimates of $157.5 million
- Free Cash Flow was -$106.4 million, down from $162.3 million in the previous quarter
- Gross Margin (GAAP): 59.2%, down from 71.9% in the same quarter last year
Founded by the former head of Google's enterprise business Dave Girouard, Upstart (NASDAQ:UPST) is an AI-powered lending platform that helps banks better evaluate the risk of lending money to a person and provide loans to more customers.
Lending Software
Businesses have come to use data driven insights to stratify their customers into more granular buckets that enable more personalized (and profitable) offerings. Lending software is a prime example of fintech democratizing access to loans in a still-profitable manner for financial institutions.
Sales Growth
As you can see below, Upstart's revenue has been declining over the last two years, shrinking from $228.7 million in Q3 FY2021 to $134.6 million this quarter.
Upstart's revenue was down again this quarter, falling 16.1% year on year.
Next quarter, Upstart is guiding for a 10.9% year-on-year revenue decline to $135 million, an improvement on the 50.4% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 30.7% over the next 12 months before the earnings results announcement.
While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Upstart's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 59.2% in Q3.
That means that for every $1 in revenue the company had $0.59 left to spend on developing new products, sales and marketing, and general administrative overhead. Upstart's gross margin is poor for a SaaS business and it's deteriorated even further over the last year. This is probably the opposite direction that shareholders would like to see it go.
Key Takeaways from Upstart's Q3 Results
Although Upstart, which has a market capitalization of $2.5 billion, has been burning cash over the last 12 months, its more than $516.6 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
We struggled to find many strong positives in these results. Its revenue guidance for next quarter underwhelmed, its revenue missed Wall Street's estimates and the company burned through significant amount of cash. Overall, this was a mixed quarter for Upstart. The company is down 13.8% on the results and currently trades at $25.35 per share.
Upstart may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
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The author has no position in any of the stocks mentioned in this report.