Upstart (NASDAQ:UPST) Delivers Impressive Q3 But Stock Drops 19.2%

Full Report / November 09, 2021
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AI lending platform Upstart (NASDAQ:UPST) reported Q3 FY2021 results that beat analyst expectations, with revenue up 249% year on year to $228.4 million. Guidance for next quarter's revenue was surprisingly good, being $260 million at the midpoint, 14.2% above what analysts were expecting. Upstart made a GAAP profit of $29.1 million, improving on its profit of $9.66 million, in the same quarter last year.

Upstart (UPST) Q3 FY2021 Highlights:

  • Revenue: $228.4 million vs analyst estimates of $214.8 million (6.31% beat)
  • EPS (non-GAAP): $0.60 vs analyst estimates of $0.33 (80.3% beat)
  • Revenue guidance for Q4 2021 is $260 million at the midpoint, above analyst estimates of $227.6 million
  • Free cash flow of $38.3 million, down 57% from previous quarter
  • Gross Margin (GAAP): 84.6%, down from 85.6% 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.

There is a significant number of people who still aren't able to access financial products and services because they either don't fit the exact brackets banks are trying to fit them in or because they just didn't seem to be lucrative enough customers. Whether it is lending, banking or brokerages, financial technology is changing that. It is bringing in the ability to serve customers at scale and low cost at the same time, democratizing access to important services for unrepresented families and consumers.

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 $65.3 million, to $228.4 million.

Upstart Total Revenue

This was another standout quarter with the revenue up a splendid 249% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $34.5 million in Q3, compared to $71.5 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 74% over the next twelve months, although estimates are likely to change post earnings.


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 84.6% in Q3.

Upstart Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.84 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop that is still a great gross margin, that allows companies like Upstart to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from Upstart's Q3 Results

With a market capitalization of $26 billion, more than $1.04 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by the exceptional revenue growth Upstart delivered this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Zooming out, we think this impressive quarter should have shareholders feeling very positive. But investors might have been expecting more and the company is down 19.2% on the results and currently trades at $253 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. There are numerous reasons why we think Upstart is one of the best software as service companies out there. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.

There's no doubt that the market is optimistic about Upstart's growth prospects, as its price to sales ratio based on the next twelve months of 30.4x would suggest. And looking at the tech landscape today, Upstart's qualities really stand out. We are big fans at this price, even more so considering the company is actually trading at a multiple lower than many similar companies with similar growth rates.

The Wall St analysts covering the company had a one year price target of $305.5 per share right before these results, implying that they saw upside in buying Upstart even in the short term.

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