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Upstart Holdings, Inc. Cover Image

Upstart (NASDAQ:UPST): Building Better Tools For The World Of Credit

Jabin Bastian 2021/06/01 1:50am

AI lending platform Upstart (NASDAQ:UPST) beat analyst expectations on the 12th of May, in Q1 FY2021 quarter, with revenue up 81.9% year on year to $122.3 million. Upstart made a GAAP profit of $10.1 million, improving on its profit of $992 thousand, in the same quarter last year.

Upstart (UPST) Q1 FY2021 Highlights:

  • Revenue: $122.3 million vs analyst estimates of $116 million (5.44% beat)
  • EPS (non-GAAP): $0.22 vs analyst estimates of $0.15 (47.2% beat)
  • Gross Margin (GAAP): 85.7%, in line with previous quarter
  • Free Cash Flow: $42.4 million, compared to $10.1 million in FY2020
  • Revenue guidance for Q2 2021 is $155 million at the midpoint
  • The company upgraded its full year 2021 revenue guidance to $600 milion, up from $500 million

Building Better Tools For The World Of Credit

Founded in 2012, 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.

The ways lenders determine credit approvals in the US have not really changed in over 30 years and are still mainly relying 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 started by evaluating applicants for personal loans, but their target market also includes auto loans, credit cards and mortgages.

Sales Growth

As you can see below, despite the hiccup in Q2 caused by Covid, Upstart's revenue growth has been very strong over the last twelve months, almost doubling from $67.2 million to $122.3 million.

Upstart Total Revenue

And this was another standout quarter for Upstart with quarterly revenue up an absolutely stunning 81.9% year on year. On top of that, revenue increased $34.5 million quarter on quarter, a very strong improvement on the $22.4 million increase in Q4 2020, and a sign of acceleration of growth, which is very rare to see at these levels.

The company is guiding for the revenue in the current financial year 2021 to be around $600 million, up more than 250% on the $233 million the company made in 2020. The analysts covering the company agree with these estimates, and Upstart has a history of living up expectations.

High-Margins Business Model

Upstart's gross profit margin, an important metric measuring how much money there is left after paying for mandatory expenses related to providing their service, was at 85.7% in Q1. That means for every $1 in revenue, the company had $0.85 left to spend on developing new products, marketing & sales and the general administrative overhead.

Upstart Gross Margin (GAAP)

This is 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. It is good to see that the gross margin is staying stable which indicates that Upstart is doing a good job controlling costs and is not under pressure from competition to lower prices.


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.

We are fans of founder-led companies because they tend to outperform hired management, and with 15.3% of shares outstanding, the CEO and founder Dave Girouard is all in on Upstart.

Why Upstart Stands Out

We are impressed by the exceptional revenue growth Upstart has been delivering. With a market cap of $12.8 billion, Upstart is still among smaller companies but it has more than $336 million in cash on the balance sheet, and is both free cash flow positive and GAAP net income profitable (a rare sight these days!) and that puts the company in a very strong position to further invest in growth.

Overall, Q1 was a strong quarter that should leave shareholders feeling very positive. The growth was extremely strong, the company significantly upgraded full year guidance and we were excited to see that it again outperformed Wall St’s expectations. We believe Upstart is a very compelling growth stock and will continue to stand out as one, arguably even more so after these results.

Is Now The Time?

As of writing this (31st of May) the company is up over 400% since its IPO in December and is currently trading at $148, 12% down from its 52-week high. The Wall St analysts covering the company have a consensus buy rating and a target price $139 per share, and their price target has been continually increasing as Upstart continues exceed expectations.


After the recent drop from all-time high price, Upstart trades at 17x forward looking price-to-sales (NTM), which is still high but a lot lower than what is typical for similar, high-growing software companies. Upstart’s exceptionally high growth rate could make that sales multiple come down in a hurry, and its asset-light balance sheet makes it easier to benefit from economies of scale. Those high valuations mean that shareholders should be comfortable with some volatility, although it can also mean future buying opportunities.

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The author has no position in any of the stocks mentioned.