Upstart (UPST) Stock: Price Swings and Investor Sentiment

Okay, let's dissect Upstart's (UPST:NASDAQ) recent Q3 earnings report. The headline numbers look decent enough: loan originations up 80% year-on-year, revenue climbing 71%. CEO Dave Girouard is touting "AI leadership" and "exceptional credit performance." But as any seasoned analyst knows, it's crucial to dig deeper than the press release.

The first thing that jumps out is the discrepancy between revenue growth and loan origination growth. Originations are up 80%, yet revenue only increased 71%. Why isn’t the revenue keeping pace? It suggests that Upstart might be originating more loans, but making less per loan. This could be due to pricing pressure, a shift in the mix of loans (smaller loans, for example), or increased costs associated with funding.

Digging into Profitability

Then there's the profitability question. GAAP net income swung from a loss of $6.8 million in Q3 2024 to a profit of $31.8 million this quarter. That's a sixfold increase (actually, closer to a 5.7-fold increase, if we're being precise). But, and this is a big but, operating cash flow turned negative, hitting -$256.28M. How can a company be profitable on a GAAP basis but hemorrhaging cash?

This is the part of the report that I find genuinely puzzling. A profitable company should be generating cash, not burning it. The company carries $2.16B in total liabilities against $489.78M in cash and $743.72M in shareholders’ equity. The cash flow deterioration despite profitability improvement deserves clarity.

One possible explanation lies in the way Upstart funds its loans. As a marketplace lender, Upstart relies on a network of banks and credit unions to actually fund the loans it originates. If these funding partners become more risk-averse (perhaps due to macroeconomic concerns, as the "Prediction" article suggests), Upstart may have to hold more loans on its own balance sheet, tying up cash. We don't have enough detail on the conference call to be sure.

The company's Q4 guidance doesn't exactly inspire confidence either. They're projecting revenue of approximately $288 million and adjusted EBITDA of $63 million. While still positive, this suggests a slowdown in growth compared to Q3. The full-year 2025 revenue guidance stands at $1.035B.

Another crucial point: Upstart claims that over 90% of loans processed through its platform are fully automated. That sounds impressive, and it speaks to the efficiency of their AI-driven credit decisioning model. However, automation doesn't necessarily equal better credit quality. If the AI is trained on flawed data or if the underlying model is misspecified, automation could simply amplify existing biases or errors.

The question is, how do we truly know if Upstart's AI is superior to traditional credit scoring methods? They claim their solution allows for 43% more approvals without any additional defaults. But where does this number come from? Is it based on rigorous, independent testing, or is it simply a backtested result from their own data? I would like to see the data.

It's also worth noting that Upstart's stock took a hit after the earnings release, falling 6% in after-hours trading. This suggests that investors weren't entirely convinced by the company's narrative. The market is often a pretty efficient (though not perfect) truth-telling machine, and a 6% drop is nothing to sneeze at.

So, Where's the Real Story?

Upstart is selling a compelling vision of AI-powered lending, and the top-line numbers are certainly eye-catching. But a closer look reveals some troubling inconsistencies and unanswered questions. Until Upstart can demonstrate sustainable cash flow generation and provide more transparency around its AI's performance, I remain skeptical. It's not necessarily smoke and mirrors, but investors should proceed with extreme caution.