Here’s why upstart stock is up 48% after earnings

Key points

• Upstart stock jumped 48% on Wednesday, making it one of the day's top gainers.

• The fintech posted solid earnings and estimated significant revenue gains in the second half of the year.

• Should investors buy Upstart stock?

The AI-fueled fintech was one of the top gainers on the market Wednesday.

Upstart (NASDAQ: UPST) stock surged 48% higher Wednesday after the company reported solid second quarter earnings and an improved revenue outlook for the second half of the year.

The fintech, which uses AI to process bank loans, beat analysts’ estimates, generating $128 million in revenue, which was a bit better than the $124 million that was projected.

Upstart had a net loss of $54.5 million in the second quarter, or -62 cents per share, while the adjusted net loss of $15.3 million, or -17 cents per share. The adjusted net loss was far better than the 39 cents per share net loss that was projected.

The quarterly numbers were not all that impressive, considering the massive 48% spike in earnings. The huge gain in Upstart stock likely had more to do with a promising revenue outlook for the beaten down fintech.

A long way down

Upstart was a fintech darling when it went public in late 2020 at about $26 per share. It rode the wave of irrational exuberance that lifted many tech stocks in the post-pandemic market surge as its stock price rose to a ridiculous $400 per share in 2021. Investors who got in on that IPO made a lot of money if they sold high.

But then things turned south in late 2021 and 2022 and Upstart, without the earnings to back up the price surge, crashed along with it. Upstart stock was in a freefall, bottoming out at around $11 per share in March of 2023. From its highs, it experienced about a 97% decline in value.

About a year ago in July of 2023, Upstart stock got back over $60 per share, but it soon fell back down.

The stock price is down about 41% year-to-date (YTD), even with today’s huge spike, and is trading at around $35 per share.

Why Upstart stock fell

The initial excitement around Upstart stemmed from its unique and groundbreaking technology, which allows banks and financial institutions to use its platform to assess risk and automate bank loans using AI.

However, Upstart’s fortunes turned when inflation rates soared and interest rates spiked to over 5%. This led to less lending by banks, which in turn led to lower fee revenue for Upstart. At the same time, expenses were rising as Upstart was investing heavily in its technology.

Now, Upstart has been trying to get back to profitability, as it looks to improve upon its technology and reduce expenses.

In the second quarter, total revenue was down 6% to $128 million while the net loss increased year-over-year to $54.5 million, from a net loss of $28.2 million a year ago. Expenses rose 8% to $183 million.

The drop in revenue stemmed from a 6% year-over-year decline in transactions on its platform, as 143,900 loans were originated, totaling $1.1 billion.

Most of its revenue comes from fees from its bank clients who use the platform, and fees are, in part, based on the volume of loans conducted using Upstart’s technology. In the second quarter, fee revenue was down 9% year-over-year, as this remains a difficult lending environment.

The company does generate some interest income on its own loans, but because it does not have deposits, it must borrow the funding from third parties to handle its own loan requests. As a result of high borrowing costs, Upstart has consistently generated a net interest loss in this environment.

An improving outlook

Investors may believe, based on Wednesday’s price increase, that Upstart has turned the corner and is on the road to profitability after its Q2 release and outlook.

In the outlook, Upstart officials called for revenue of $150 million, including $155 million in fee revenue, minus a $5 million net interest loss. That is a significant 18% increase in fee revenue compared to the second quarter.

“The guidance we released today demonstrates that we’re on track toward resuming our role as the fintech known for high growth and healthy margins,” Dave Girouard, CEO of Upstart, said. “The improvements in our business are coming from significant advances in our AI model, a revitalized funding supply, and increased operating efficiency. These wins and more are providing the foundation for the Upstart comeback story.”

Also, while it still doesn’t expect to be profitability, a projected net loss of $49 million, and an adjusted net loss of $14 million, are slightly better than Q2. Further, the adjusted EBITDA is predicted to be -$5 million in Q3, compared to -$9 million in Q2.

As for the full year, Upstart projects revenue of $300 million, which would indicate an even better Q4 than Q3. In addition, the company anticipates having positive adjusted EBITDA in Q4.

Is Upstart stock a buy?

Upstart got several price target upgrades post-earnings, but most analysts still don’t consider it a buy.

While Upstart could see a big boost if and when the Fed lowers interest rates, the environment is just too uncertain and the stock is too volatile to warrant a buy right now.

But it is one to revisit, perhaps toward the end of the year or next year, if it becomes consistently profitable and the macroenvironment for lending improves.