Shares of AI-driven lending platform Upstart Holdings (UPST) surged nearly 30% in early trading on Feb. 12 after the company delivered strong fourth-quarter earnings and an optimistic Q1 2025 outlook. The quarterly revenue and earnings exceeded Wall Street estimates, while its Q1 top-line guidance surpassed analysts’ projections.
Upstart’s Q4: A Stellar Performance
Upstart’s fourth-quarter results indicate strong business momentum. Loan originations saw a significant uptick, translating into higher revenue. The company also improved its net interest income, optimized conversion rates, and controlled fixed expenses.
Revenue from fees grew to $199 million, marking a 30% year-over-year increase and a 19% sequential rise, driven by AI model enhancements and lower interest rates. Net interest income improved to $20 million, a sharp turnaround from a $12.5 million loss in the prior year quarter. Overall, net revenue reached $219 million, representing a 56% YOY increase and a 35% jump from the previous quarter.
Loan transaction volume was equally impressive. Upstart facilitated approximately 246,000 loan transactions in Q4, an 89% YOY increase, and a 31% sequential improvement. Of these, 162,000 were new borrowers, indicating strong demand. The average loan size also inched up to $8,580 from $8,400 in the prior quarter, reflecting Upstart’s enhanced AI-driven underwriting model, which allows for larger loan approvals.
Upstart’s contribution margin remained steady at 61%, demonstrating efficiency in customer acquisition. Additionally, the company’s conversion rate rose to 19.3%, its highest level in nearly three years, compared to 11.6% in Q4 2023. Meanwhile, adjusted earnings per share (EPS) came in at $0.26, reflecting a sharp improvement from the prior year quarter.
Momentum in Auto Loans and Home Equity Lending
Beyond its core personal loans, Upstart is rapidly expanding its presence in auto loan refinancing and home equity line of credit (HELOC) offerings. The company’s auto refinance business saw significant traction, with conversion rates improving sevenfold throughout 2024. Additionally, modest reductions in base interest rates have revived demand in this segment, positioning Upstart to capitalize on a growing refinancing market in 2025.
Upstart’s HELOC business also demonstrated strong momentum, growing approximately 60% sequentially. Expanding state eligibility, improved conversion rates, and effective cross-selling strategies are key to scaling this segment.
Key Factors Supporting Upstart’s Stock Growth
Upstart’s core strength lies in its AI-powered lending model, which continuously refines its ability to assess borrowers’ creditworthiness. By leveraging AI, the company can approve a greater volume of loans while mitigating risks for lending partners. This approach enhances profitability and provides a competitive edge. Additionally, Upstart’s ability to lower servicing costs while improving loan performance reflects the scalability of its platform.
Despite increasing loan originations, Upstart has reduced the volume of loans on its balance sheet, reinforcing its financial stability. The company ended 2024 with $806 million in loans on its books, comprising $703 million held directly and $103 million from a securitization deal where Upstart has minimal economic exposure. The $703 million in directly held loans represents a 28% YOY decline, although it increased from Q3’s $537 million due to higher-than-expected borrower demand. Further, Upstart has expanded funding arrangements to mitigate this short-term issue.
Upstart strengthened its capital position through strategic funding agreements. In Q4, the company increased its funding commitments with private credit partners by $1.3 billion and secured a $150 million personal loan warehouse facility. These developments highlight the confidence that capital providers have in Upstart’s platform.
Furthermore, 2024 marked a resurgence in lender participation on Upstart’s platform. Banks and credit unions expanded their loan volumes. Originations through Upstart’s lending partners surged 30% quarter-over-quarter and 76% YOY. The company also enhanced its balance sheet, refinancing its 2026 convertible debt and raising nearly $500 million to bolster liquidity. All these measures position it well to deliver solid growth in 2025 and beyond.
Should Investors Buy, Hold, or Cash Out?
While Upstart’s strong fundamentals and improving credit trends make a compelling case for long-term growth, the sharp rally in its stock over the past year has kept analysts cautious. The stock currently holds a “Hold” consensus rating, as some analysts believe the recent surge in share price already reflects much of the company’s near-term potential.
For long-term investors, Upstart remains well-positioned to benefit from a more favorable interest rate environment, growing funding agreements, and advancements in AI-powered underwriting capabilities. However, those looking to secure profits might consider a gradual exit strategy.
