Upstart (NASDAQ:UPST) Reports Sales Below Analyst Estimates In Q2 Earnings

Full Report / September 28, 2022
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AI lending platform Upstart (NASDAQ:UPST) fell short of analyst expectations in Q2 FY2022 quarter, with revenue up 16.7% year on year to $228.1 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $170 million at the midpoint, or 31% below analyst estimates. Upstart made a GAAP loss of $29.8 million, down on its profit of $37.2 million, in the same quarter last year.

Upstart (UPST) Q2 FY2022 Highlights:

  • Revenue: $228.1 million vs analyst estimates of $235.2 million (3.03% miss)
  • EPS (non-GAAP): $0.01 vs analyst estimates of $0.08 ($0.07 miss)
  • Revenue guidance for Q3 2022 is $170 million at the midpoint, below analyst estimates of $246.5 million
  • Free cash flow was negative $60.7 million, compared to negative free cash flow of $272 million in previous quarter
  • Gross Margin (GAAP): 74.9%, down from 87.6% 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

As you can see below, Upstart's revenue growth has been incredible over the last year, growing from quarterly revenue of $195.4 million, to $228.1 million.

Upstart Total Revenue

Even though Upstart fell short of revenue estimates, its quarterly revenue growth was still up 16.7% year on year. But the revenue actually decreased by $81.9 million in Q2, compared to a $4.81 million increase in Q1 2022. Shareholders might want to pay closer attention to this as the management is guiding for the decline in sales to continue in the coming quarter

Upstart is guiding for revenue to decline next quarter by 25.6% year on year to $170 million, a deceleration on the 242% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 10.1% over the next twelve 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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 74.9% in Q2.

Upstart Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.74 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Upstart burned through $60.7 million in Q2, with cash flow turning negative year on year.

Upstart Free Cash Flow

Upstart has burned through $306.8 million in cash over the last twelve months, a negative 28.6% free cash flow margin. This low FCF margin is a result of Upstart's need to still heavily invest in the business.

Key Takeaways from Upstart's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Upstart’s balance sheet, but we note that with a market capitalization of $2.5 billion and more than $790.4 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Upstart. The company currently trades at $21.5 per share.

Is Now The Time?

When considering Upstart, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Upstart we will be cheering from the sidelines. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its impressive gross margins are indicative of excellent business economics, unfortunately its growth is coming at a cost of significant cash burn.

Upstart's price to sales ratio based on the next twelve months is 2.3x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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