Upstart (UPST)

AI lending platform Upstart (NASDAQ:UPST) missed Wall Street’s revenue expectations in Q3 CY2025, but sales rose 70.9% year on year to $277.1 million. Next quarter’s revenue guidance of $288 million underwhelmed, coming in 6.1% below analysts’ estimates. Its non-GAAP profit of $0.52 per share was 23.4% above analysts’ consensus estimates.

Company Overview

Using over 2,500 data variables and trained on nearly 82 million repayment events, Upstart (NASDAQ:UPST) is an AI-powered lending platform that uses machine learning to help banks and credit unions more accurately assess borrower risk for personal loans, auto loans, and home equity lines of credit.

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 competes with traditional credit scoring companies like FICO (NYSE:FICO) and Experian (OTCMKTS:EXPGY), fintech lenders such as LendingClub (NYSE:LC) and SoFi (NASDAQ:SOFI), and AI lending platforms including Pagaya Technologies (NASDAQ:PGY).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, Upstart’s sales grew at an exceptional 35.8% compounded annual growth rate over the last five years. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Upstart’s annualized revenue growth of 36.3% over the last two years aligns with its five-year trend, suggesting its demand was predictably strong.

This quarter, Upstart achieved a magnificent 70.9% year-on-year revenue growth rate, but its $277.1 million of revenue fell short of Wall Street’s lofty estimates. Company management is currently guiding for a 31.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 32.8% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is admirable and suggests the market is forecasting success for its products and services.

Total transaction volumes show the aggregate dollar value of loans processed on Upstart’s platform. This is the number from which the company will ultimately collect fees, and the higher it is, the more accurate its software becomes at assessing credit risk.

Upstart’s transaction volume punched in at $2.85 billion in Q3, and over the last four quarters, its growth was fantastic as it averaged 97.8% year-on-year increases. This alternate topline metric grew faster than total sales, meaning its loan processing fees outpaced the interest income from loans retained on its balance sheet. If this trend continues, it would lower Upstart’s risk profile as it would reduce its exposure to delinquencies and defaults.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Upstart’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Upstart’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 81.5% gross margin over the last year. Said differently, roughly $81.53 was left to spend on selling, marketing, and R&D for every $100 in revenue.

Upstart has done a decent job managing its cost base over the last year. The company has produced an average operating margin of 2%, higher than the broader software sector.

Analyzing the trend in its profitability, Upstart’s operating margin rose by 40.6 percentage points over the last two years, as its sales growth gave it immense operating leverage.

In Q3, Upstart generated an operating margin profit margin of 8.5%, up 36.4 percentage points year on year. The increase was solid and shows its expenses recently grew slower than its revenue, leading to higher efficiency.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Upstart’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 43.9%, meaning it lit $43.92 of cash on fire for every $100 in revenue.

Upstart burned through $126.6 million of cash in Q3, equivalent to a negative 45.7% margin. The company’s cash flow turned negative after being positive in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Upstart burned through $424.6 million of cash over the last year, and its $1.90 billion of debt exceeds the $836.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Upstart’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Upstart until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly Upstart blew past analysts’ EBITDA expectations this quarter. On the other hand, its full-year revenue guidance missed and its transaction volume fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 13.6% to $40 immediately following the results.

Updated: December 4, 2025 at 9:20 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Upstart.

Upstart is a pretty decent company if you ignore its balance sheet. To kick things off, its revenue growth was exceptional over the last five years. And while its customer acquisition is less efficient than many comparable companies, its expanding operating margin shows it’s becoming more efficient at building and selling its software. On top of that, its transaction volumes have soared, showcasing high user engagement and robust platform activity.

Upstart’s price-to-sales ratio based on the next 12 months is 4.1x. Despite its notable business characteristics, we’d hold off for now because its balance sheet concerns us. We recommend investors interested in the company wait until it reduces its leverage or increases its profits before getting involved.

Wall Street analysts have a consensus one-year price target of $55.38 on the company (compared to the current share price of $47.13).