Upstart (NASDAQ:UPST) Exceeds Q1 Expectations But Stock Drops 36.8%

Full Report / June 28, 2022
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AI lending platform Upstart (NASDAQ:UPST) beat analyst expectations in Q1 FY2022 quarter, with revenue up 153% year on year to $310.1 million. However, guidance for the next quarter was less impressive, coming in at $300 million at the midpoint, being 10.4% below analyst estimates. Upstart made a GAAP profit of $32.6 million, improving on its profit of $10.1 million, in the same quarter last year.

Upstart (UPST) Q1 FY2022 Highlights:

  • Revenue: $310.1 million vs analyst estimates of $300.1 million (3.33% beat)
  • EPS (non-GAAP): $0.61 vs analyst estimates of $0.53 (15.2% beat)
  • Revenue guidance for Q2 2022 is $300 million at the midpoint, below analyst estimates of $334.8 million
  • The company dropped revenue guidance for the full year, from $1.4 billion to $1.25 billion at the midpoint, a 10.7% decrease
  • Free cash flow was negative $272 million, compared to negative free cash flow of $14.6 million in previous quarter
  • Gross Margin (GAAP): 83.8%, down from 85.7% 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 $122.3 million, to $310.1 million.

Upstart Total Revenue

And while we saw even higher rates of growth previously, the revenue growth was still very strong; up a rather splendid 153% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.81 million in Q1, compared to $76.6 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Upstart is expecting revenue to grow 53.4% year on year to $300 million, slowing down from the 896% 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 49.2% 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 83.8% in Q1.

Upstart Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.83 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.

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 $272 million in Q1, with cash flow turning negative year on year.

Upstart Free Cash Flow

Upstart has burned through $154.9 million in cash over the last twelve months, a negative 14.9% 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 Q1 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 $7.1 billion and more than $757.8 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth Upstart delivered this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that Upstart's revenue guidance for the full year missed analyst's expectations. Overall, this quarter's results were not the best we've seen from Upstart. The company currently trades at $39 per share.

Is Now The Time?

Upstart may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Upstart is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its growth is coming at a cost of significant cash burn, the good news is its impressive gross margins are indicative of excellent business economics.

Upstart's price to sales ratio based on the next twelve months is 4.8x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about Upstart and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $213 per share right before these results, implying that they saw upside in buying Upstart even in the short term.

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