Upstart's (NASDAQ:UPST) Posts Q2 Sales In Line With Estimates But Stock Drops 17.9%

Full Report / August 08, 2023

AI lending platform Upstart (NASDAQ:UPST) reported results in line with analysts' expectations in Q2 FY2023, with revenue down 41.1% year on year to $135.8 million. However, next quarter's revenue guidance of $140 million was less impressive, coming in 9.92% below analysts' estimates. Upstart made a GAAP loss of $28.2 million, improving from its loss of $29.9 million in the same quarter last year.

Upstart (UPST) Q2 FY2023 Highlights:

  • Revenue: $135.8 million vs analyst estimates of $135.3 million (small beat)
  • EPS (non-GAAP): $0.06 vs analyst estimates of -$0.07 ($0.13 beat)
  • Revenue Guidance for Q3 2023 is $140 million at the midpoint, below analyst estimates of $155.4 million
  • Free Cash Flow of $160.4 million is up from -$81.2 million in the previous quarter
  • Gross Margin (GAAP): 57.3%, down from 77.8% 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.

After a successful stint at Google where he started what later became Google Cloud, Dave Girouard founded Upstart together with his former colleague Anna Counselman and data scientist Paul Gu.

The ways lenders determine credit approvals in the US have not really changed in over 30 years and still rely mainly on FICO and simplistic rules-based systems. As a result, millions of creditworthy individuals who don’t fit into the precise brackets are either not approved for loans at all, or pay too much to borrow money. Upstart instead uses cloud-computing and machine learning to evaluate more than 1,000 data-points for each loan applicant, allowing them to estimate the risk of default on a loan more precisely, and for more people. For consumers, it means higher approval rates and lower interest rates and for banks it means access to new customers and lower fraud and loss rates. Because the decision is now made by software, it also means all-digital, automated experience from start to end.

Upstart provides their technology to banks and for some customers serves as an intermediary, but itself bears no credit risk and just simply charges the banks a fee for every provided loan. The company has started by evaluating applicants for personal loans, but their target market also includes auto loans, credit cards and mortgages.

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.

Upstart’s main competitor would be FICO (NYSE:FICO), others somewhat related might include alternative lenders like Lending Tree (NASDAQ:TREE).

Sales Growth

Upstart Total Revenue

This quarter, Upstart's revenue was down 41.1% year on year, which might disappointment some shareholders.

Next quarter, Upstart is guiding for a 12.7% year-on-year revenue decline to $140 million, an improvement on the 29.9% year-on-year decrease it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 27.4% over the next 12 months.


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 57.3% in Q2.

Upstart Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.57 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.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Upstart's free cash flow came in at $160.4 million in Q2, turning positive over the last year.

Upstart Free Cash Flow

Upstart has burned through $278.3 million of cash over the last 12 months, resulting in a negative 47% free cash flow margin. This low FCF margin stems from Upstart's poor unit economics or a constant need to reinvest in its business to stay competitive.

Key Takeaways from Upstart's Q2 Results

Although Upstart, which has a market capitalization of $4.3 billion, has been burning cash over the last 12 months, its more than $443.7 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. Transaction volume missed and was down significantly year on year. Also the conversion on rate requests was 9%, below the expectation of 10%. Both revenue and adjusted EBITDA guidance for next quarter missed analysts' estimates and its gross margin declined. Overall, the results were bad. The company is down 17.9% on the results and currently trades at $42.52 per share.

Is Now The Time?

When considering an investment in Upstart, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of Upstart, we'll be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. On top of that, unfortunately its customer acquisition is less efficient than many comparable companies and growth is coming at a cost of significant cash burn.

Given its price to sales ratio based on the next 12 months is 6.1x, Upstart is priced with expectations of a long-term growth, and there's no doubt it's a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

Wall Street analysts covering the company had a one year price target of $23.7 per share right before these results, implying that they didn't see much short-term potential in the Upstart.

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