Upstart: Riding the AI wave

Upstart is a fintech company that wants to make borrowing money smarter and more fair by using artificial intelligence. Instead of relying only on credit scores like most lenders do, Upstart’s technology looks at many other factors to better understand who is likely to repay a loan. The company works with banks and credit unions to help more people get approved for loans - often at lower interest rates. Instead of acting as a traditional lender, Upstart provides the technology and underwriting tools, while the actual loans are funded by its network of financial partners. The question is: Should this AI-driven lender have a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Upstart at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Upstart, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Upstart is a financial technology company founded in 2012 with the mission to expand access to affordable credit. It operates a cloud-based AI lending platform that connects consumers to over 100 banks and credit unions. Unlike traditional credit models that rely heavily on FICO scores, Upstart’s approach leverages more than 2.500 variables - including education, employment history, bank transactions, and cost of living - to assess creditworthiness. This allows its lending partners to approve more borrowers at lower interest rates while reducing fraud, loss rates, and manual processes. Rather than funding loans itself, Upstart acts as a technology provider that facilitates loans between consumers and its lending partners or institutional investors. It earns most of its revenue by charging platform and referral fees when loans are originated through its system. Additionally, it earns income from managing loans for others and from temporarily holding or packaging loans before selling them to investors. The company’s competitive moat lies in its AI models, which have been trained and refined over more than a decade using tens of millions of repayment events. These models do far more than predict default risk—they also detect fraud, anticipate early repayments, identify multiple loan applications, and guide servicing strategies. In 2024, 91% of Upstart-powered loans were fully automated, reflecting the power of its AI investments. As more loans flow through the system, the models improve further, creating a flywheel that drives better outcomes for borrowers and lenders alike while strengthening Upstart’s data advantage. Consumers can apply for loans through Upstart’s website, through lender-branded portals, or at participating auto dealerships. Once approved, funding is provided not by Upstart, but by a bank, credit union, or institutional investor. These investors may purchase individual loans or invest in pools of loans packaged and sold by Upstart. This approach gives the company flexible and diversified funding, allowing it to scale efficiently while focusing on its core strength - building ever-better AI models. Because developing high-performing lending models requires both massive data and deep machine learning expertise, Upstart’s competitive position is not easy to copy.

Management

David Girouard serves as the CEO of Upstart, a company he co-founded in 2012 with the goal of transforming the credit industry through the use of artificial intelligence. Before launching Upstart, David Girouard built a distinguished career in the tech sector, most notably at Google, where he served as President of Google Enterprise and helped scale the division into a multibillion-dollar business. Earlier in his career, he held roles at Apple and Booz Allen Hamilton. He holds an MBA from the University of Michigan and a bachelor’s degree in engineering from Dartmouth College. David Girouard founded Upstart out of a belief that the financial services industry had grown stagnant, relying on outdated credit models like FICO that excluded millions of creditworthy borrowers. He saw a meaningful opportunity to apply data science and modern technology to unlock access to credit and build a more inclusive financial system. He has often said that millennials lack strong loyalty to traditional banks and that the next generation of financial institutions will be built on trusted consumer brands, much like Apple or Nike. With Upstart, he aims to deliver that kind of customer experience - offering the lowest possible rates and the most seamless application process, powered by AI. Known for his product focus and long-term mindset, David Girouard emphasizes simplicity, speed, and transparency in the lending process. When asked how he motivates people, he notes that he hires self-motivated individuals who are inspired by the opportunity to build a company that could reshape finance for decades to come. His vision is deeply rooted in the belief that world-changing companies are built by exceptional teams, which is why it’s notable that one of Upstart’s other co-founders, Paul Gu - a former colleague from Google - remains actively involved in the company’s leadership. Given his extensive experience in technology, his long-term commitment to Upstart’s mission, and his ambition to redefine financial services, I believe David Girouard is exceptionally well-suited to lead the company forward.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Upstart made its IPO in December 2020, so we only have data from 2021 and onward. Unfortunately, Upstart has recorded a negative ROIC in three out of the four years available. Several factors have contributed to this underperformance. First, macroeconomic headwinds - such as rising interest rates and tighter credit conditions - have significantly reduced loan origination volumes, which in turn has cut into Upstart’s fee-based revenue. Second, the company has continued to invest heavily in its AI models and infrastructure despite lower revenues. While these investments are critical for long-term growth, they have driven up short-term operational expenses. Third, Upstart increased its balance sheet exposure by holding more loans to offset reduced demand from lending partners. This raised the company’s financial risk and capital requirements, putting further pressure on ROIC. Finally, Upstart has taken on additional debt to support its operations and loan warehousing, which has contributed to the negative returns on invested capital. That said, there are signs of improvement. In late 2024, Upstart saw a recovery in loan origination volumes and revenue growth, along with better profitability metrics. If these positive trends continue, the company could return to a positive ROIC in the near future. Still, since its IPO, ROIC has been disappointing in most years.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Equity has decreased every year since 2021. Several factors have contributed to this decline. Upstart reported net losses in both 2022 and 2023, which directly reduced retained earnings and, as a result, shareholder equity. In addition, to maintain loan origination volumes amid reduced demand from lending partners, Upstart held more loans on its balance sheet. This strategy raised financial risk and capital requirements, further weighing on equity. However, looking ahead, there are reasons to expect improvement. In 2024, Upstart increased its contribution margin compared to the prior year, signaling improved operational efficiency. The company also reported year-over-year revenue growth, suggesting a potential recovery. Moreover, CEO David Girouard has expressed optimism about reaching at least break-even GAAP net income in 2025 - a development that, if realized, would help rebuild retained earnings and strengthen equity. If these positive trends continue, we should see improvements in equity moving forward.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Upstart has managed to achieve positive free cash flow in two out of the four years since its IPO. It is encouraging that the company recorded both its highest free cash flow and its highest levered free cash flow margin in 2024. Several factors contributed to this improvement, including revenue growth, better conversion rates, improved operational efficiency, and a reduced percentage of loans held on its balance sheet. Management has stated that they expect free cash flow to continue improving going forward. Upstart plans to reinvest that cash into its AI technology and lending platform to enhance underwriting accuracy and support the development of new loan products. The company is also allocating capital to strengthen its funding network by building the infrastructure and partnerships needed to secure long-term institutional capital. This helps Upstart remain resilient through changing market conditions. Additionally, by reducing the amount of loans it holds on its own balance sheet, the company lowers financial risk and frees up capital, making its model more efficient and scalable. As a result, investors should expect Upstart to prioritize reinvestment in the business over returning capital through dividends or buybacks. While the company’s free cash flow yield is now at its highest level since the IPO, at around 4%, it still suggests that shares are trading at a premium. That said, we will revisit valuation later in the analysis.

Debt

Another important area to investigate is debt, and we want to see whether a business has a reasonable level of debt that could be paid off within three years. To assess this, we divide total long-term debt by earnings. Upstart has reported negative earnings since 2021. Therefore, I will use the earnings from 2021 but compare them to the long-term debt reported in 2024. When applying this measure to Upstart, the result shows it would take approximately 11,45 years of earnings to pay off its long-term debt - far above the three-year threshold. Upstart has seen a significant increase in its debt levels since its IPO in December 2020. This rise is mainly due to the company holding more loans on its balance sheet in order to sustain origination volumes during periods of reduced demand from lending partners. As Upstart has stated plans to hold fewer loans moving forward, we may see this trend begin to reverse. While the company has not explicitly made debt reduction a top priority, it has taken steps to manage its debt profile. For example, it replaced a convertible bond maturing in 2026 with new debt instruments due in 2029 and 2030 - effectively extending maturities and easing near-term pressure. In summary, I believe Upstart’s debt position is a concern and should be monitored closely.

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Risks

Macroeconomic conditions pose a major risk to Upstart's business model because the company operates at the intersection of consumer credit demand and investor funding supply - both of which are highly sensitive to the broader economy. Upstart relies on a steady flow of capital from banks and institutional investors to fund loans on its marketplace, while also depending on borrowers’ demand for credit and their ability to repay. During periods of economic uncertainty - such as rising interest rates, inflation, or declining consumer confidence - this system can become strained on multiple fronts. Lending partners may become more cautious and reduce funding, while institutional investors may pull back due to increased risk or tighter capital markets. At the same time, consumers may delay borrowing or become less creditworthy due to job loss, higher living costs, or reduced disposable income. These dynamics can sharply reduce loan originations, which directly impacts Upstart’s fee-based revenue. Upstart is particularly vulnerable in downturns because a large share of its borrowers have thin or non-traditional credit histories. These individuals are more likely to struggle in tough economic times and may deprioritize repayments on unsecured personal loans - especially when compared to essential, secured obligations like mortgages or auto loans. This can lead to higher default rates and loan charge-offs, which in turn discourage capital providers from participating in Upstart’s marketplace. In fact, the company has already seen the effects of this dynamic. Loan vintages from early 2021 through early 2024 are forecasted to underperform relative to original expectations, largely due to macro-related stresses. In response, Upstart has had to fund more loans from its own balance sheet, which increases risk and limits scalability.

Loss of brand reputation is a significant risk for Upstart. The company’s ability to grow relies heavily on maintaining trust among borrowers, lending partners, and institutional investors. As a relatively new and AI-driven lending platform, Upstart depends on the perception that its technology delivers fair, accurate, and efficient outcomes. If trust in the brand weakens, it could reduce borrower demand, cause lending partners to withdraw, and limit participation from funding sources. Upstart’s approach to lending is fundamentally different from traditional models, but that distinction is not always understood. The company has occasionally been associated - fairly or not - with controversial lending practices such as payday loans, despite offering lower rates and longer terms. If public perception continues to blur these differences, Upstart’s reputation could suffer, even if its practices are materially more responsible. Reputation can also be affected by customer experience. Borrower complaints, poor servicing outcomes, or confusion about loan terms could lead to negative reviews or viral posts on social media, which can quickly erode brand value in a consumer-facing business. In the same way, performance issues such as higher-than-expected default rates may not only affect financial results but also create doubts about the reliability of Upstart’s AI models - undermining trust in its core technology. Upstart is also connected to third parties, including auto dealerships, whose behavior can reflect on the company. If borrowers have a negative experience with a dealership using Upstart’s platform, they may attribute that experience to Upstart itself. Similarly, public criticism of AI or platform-based lending - even if not directly tied to Upstart - can create reputational spillover risk.

Laws and regulations are a significant risk for Upstart. The company operates in the heavily regulated consumer lending industry while relying on relatively new and evolving technologies like artificial intelligence. This combination exposes Upstart to a complex web of federal, state, and local laws that are frequently changing and open to varying interpretations. Any failure to comply could lead to fines, restrictions, reputational harm, or the loss of essential licenses. A key challenge is that existing consumer protection laws weren’t built with AI lending in mind. Regulators are still working out how to apply these rules to platforms like Upstart’s. As the company launches new products, enters new markets, or updates its AI models, it faces an evolving regulatory environment that makes long-term planning more difficult and increases the cost of compliance. At the federal level, agencies like the Consumer Financial Protection Bureau (CFPB) have increased their scrutiny of fintech companies. The CFPB has issued new guidance on algorithmic decision-making and fair lending - both central to Upstart’s model. Other federal regulators, such as the FTC and OCC, are also focusing more on the types of bank-fintech partnerships that Upstart uses to issue loans. At the state level, regulation is tightening as well. Some states are questioning whether the bank or the fintech is the true lender in these arrangements. Massachusetts and Ohio have already taken action to limit or reclassify such partnerships. If more states follow suit, Upstart may be forced to scale back operations or significantly alter how its marketplace functions. In summary, Upstart faces a high degree of legal and regulatory risk. Regulatory changes could restrict its ability to operate in key markets, raise compliance costs, delay innovation, or require structural changes to its business model. Because compliance is so critical to the company’s strategy and operations, any adverse regulatory developments could have a major impact on its financial performance and growth prospects.

Reasons to invest

Ongoing innovation in its AI models is a key reason to invest in Upstart. The company's entire value proposition rests on its ability to price risk more accurately than traditional credit models. As these AI models improve, they enable Upstart to approve more borrowers, offer lower interest rates, and reduce default rates - creating a strong competitive advantage that compounds over time. Recent improvements like Model 19’s Payment Transition Model (PTM) show how Upstart’s AI is evolving. Earlier versions of the model only looked at how a loan ended—whether it was paid off or defaulted. PTM adds a new layer by also learning from what happens in the middle, such as if a borrower misses a few payments but then catches up. This allows the model to better understand real-world borrowing behavior and make more accurate predictions about who is likely to repay a loan. Model 18 brought another breakthrough by including the loan’s interest rate as part of the model’s decision-making. This helped the system more precisely match risk and price, which led to a noticeable increase in loan volume and accuracy. These changes aren’t just small upgrades - they’re major steps forward that open up new ways to keep improving the model over time. More accurate models help everyone. Borrowers can qualify for lower interest rates when the model has a clearer view of their risk. At the same time, institutional investors benefit from more consistent loan performance. Automation is also improving - 91% of loans on Upstart’s platform are now fully automated. That means faster approvals for borrowers, less manual work for the company, and lower costs per loan, which strengthens Upstart’s overall business model. In essence, Upstart’s ongoing model innovation drives nearly every part of its business - improving loan conversion, lowering risk, increasing automation, and unlocking growth in new categories. That makes it one of the most important reasons to consider the company as a long-term investment.

Upstart’s newer lending products are a compelling reason to invest, as they show the company’s ability to scale its AI-driven platform beyond personal loans. New offerings like auto refinancing, home equity lines of credit (HELOCs), and small-dollar loans are gaining momentum and opening up large addressable markets. The small-dollar loan product is especially promising. These are shorter-term loans - typically 6 to 18 months - with an average size just over $1.000, compared to roughly $10.000 for Upstart’s core personal loans. Despite their modest size, these loans have shown strong credit performance and attractive margins. What makes them so strategic is that they help Upstart serve applicants who may not qualify for larger loans. This product acts as a “second look” option, bringing more borrowers into the Upstart ecosystem. Over time, many of these borrowers can be cross-sold into higher-value products like auto refinance or personal loans. The company is also seeing strong traction in home equity lines of credit (HELOCs) - a type of loan that allows homeowners to borrow against the value of their home. By the end of 2024, Upstart was offering HELOCs in 36 states, covering about 60% of the U.S. population, and had originated more than 1.000 HELOCs with zero defaults. The product has attracted interest from bank partners due to its low-risk profile and familiarity, and the first HELOC funding partnership went live in early 2025. Auto refinance has also rebounded, with conversion rates improving sevenfold across 2024. With interest rates beginning to stabilize, the company sees this as a strong cross-sell opportunity for its existing customer base. While these new products are still small compared to Upstart’s core personal loan business, they operate in much larger markets and are growing quickly. Their early success highlights the adaptability of Upstart’s AI technology and supports the case for a broader, more diversified lending platform with long-term growth potential.

Growing loan volume and a rising number of lending partners are key reasons to invest in Upstart, as they signal stronger platform adoption, increasing trust in its AI models, and improving operating leverage. In 2024, Upstart experienced a meaningful rebound. Loan originations with bank and credit union partners grew 76% year-over-year, while total loan transactions across the platform rose 89% compared to the prior year. This growth reflects renewed confidence from lending partners who had previously scaled back during periods of market uncertainty. With liquidity improving and model performance strengthening, institutions are ramping up their activity on Upstart’s platform. At the same time, Upstart continues to expand its network of lending partners, growing from just a few early adopters to over 100 banks and credit unions. Each new partner introduces additional borrower demand and increases platform utilization. Many also use Upstart for both personal and auto loan programs, amplifying the volume generated through each relationship. Higher loan volume also reinforces Upstart’s relationships with institutional investors, who provide a significant share of funding on the platform. As model performance consistently meets or exceeds return targets, investor confidence deepens - resulting in greater capital commitments. This creates a self-reinforcing flywheel: better models enable more accurate risk pricing, which leads to more approvals and better returns, attracting more funding and enabling further growth. Operationally, rising volume strengthens unit economics. Upstart has maintained - or even lowered - customer acquisition costs despite substantial growth, driven by improved targeting and higher conversion. With stable take rates and contribution margins, the business becomes increasingly efficient and scalable as volume increases.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and an estimated future price-to-earnings (P/E) ratio. The minimum acceptable rate of return is set at 15%. I chose to use an EPS of 1,43 from the year 2021, as Upstart has reported negative EPS in the years since. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 34,6% over the next five years, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Upstart's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $42,90. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Upstart at a price of $21,45 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 186, and capital expenditures were 1. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 0,7 in our calculations. The tax provision was 0. We have 91,2 outstanding shares. Hence, the calculation will be as follows: (186 – 0,7) / 91,2 x 10 = $20,32 in Ten Cap price. 

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Upstart's free cash flow per share at $2,03 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $32,05.

Conclusion

I believe that Upstart is an interesting company with strong management. The company has built a moat through its AI models, which have been trained and refined over more than a decade using tens of millions of repayment events. Upstart has reported negative ROIC in the past three years, but recent improvements suggest the company may return to positive ROIC soon. Free cash flow has been mixed, but the company delivered record-high free cash flow in 2024, which bodes well for the future. However, the company carries a high level of debt and has not prioritized paying it down in the short term. Macroeconomic conditions remain a major risk for Upstart because the company depends on both borrower demand and investor funding - two forces that tend to weaken during downturns. When interest rates rise or consumer confidence falls, loan originations drop, defaults increase, and capital providers pull back, directly impacting revenue and financial stability. Loss of brand reputation is another concern, as Upstart’s business relies heavily on trust from borrowers, lending partners, and investors in the fairness and reliability of its AI platform. Negative customer experiences, misunderstandings about its model, or broader criticism of AI lending could erode that trust. Laws and regulations also pose a significant risk. Upstart operates in a tightly regulated industry while using AI technology that current laws weren’t designed to cover. As scrutiny around fintech lending and bank partnerships increases, regulatory changes could raise compliance costs, restrict market access, or force changes to the business model. On the positive side, ongoing innovation in Upstart’s AI models is a core strength. These improvements drive more accurate risk assessment, higher approval rates, and lower default rates - benefiting both borrowers and capital providers. They also enhance automation and efficiency, strengthening Upstart’s competitive edge. Upstart’s newer lending products - such as auto refinancing, HELOCs, and small-dollar loans - demonstrate the platform’s scalability and open up large, fast-growing markets beyond personal loans. In addition, growing loan volume and an expanding network of lending partners reflect rising adoption of the platform and support improving unit economics. As volumes scale, Upstart becomes more efficient and better positioned for long-term, profitable growth. There are many things to like about Upstart, but personally I believe there are still too many unknowns and risks - such as the company’s high debt load and its need to hold loans on its balance sheet during periods of market stress. For that reason, I will not be investing in Upstart at this time.

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