Upstart (NASDAQ:UPST) came into Tuesday’s third-quarter earnings report, trading around a two-year low.
While the company has delivered solid growth on the top and bottom lines in recent quarters, investors have been skeptical of the loan origination specialist’s ability to deliver strong results in a challenging macroeconomic environment as interest rates are elevated, inflation remains sticky, and the cost of living keeps going up.
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Revenue jumped 34% in the quarter to $371 million, ahead of estimates at $363.7 million, and earnings per share rose from $0.23 to $0.33, beating expectations at $0.23.
However, originations growth has slowed to be flat sequentially, and the company raised guidance slightly for the full year for revenue from fees but lowered it on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), due to pressure on the balance sheet from the macro climate.
Investors essentially shrugged off the results, as the stock was up around 2% in afternoon trading. While the report didn’t spark a big reaction from investors, it did signal progress for the company in a number of ways. Here are three takeaways from Upstart’s Q3.
Image source: Getty Images.
1. The secured loan segment hit a huge milestone
Most of Upstart’s business still comes from unsecured personal loans, but its secured loan business in home and auto loans is growing much faster, and it represents a much larger market, in the trillions of dollars in loans in aggregate.
For the first time in the third quarter, its secured loan business was profitable with a contribution margin of 17%.
Originations in the secured segment nearly tripled to $587 million, but Upstart CEO Paul Gu, in an interview with The Motley Fool, said, “We’ve been almost exclusively focused on profitability as the goal for the secured products before we’re turning our attention to growth,” meaning the company could accelerate top-line growth in the secured category now that it has flipped to a contribution profit.
2. It’s made big strides in technology and marketing
Upstart’s core objectives come down to screening applicants for credit-worthiness as accurately as possible and marketing its product to bring in new customers and grow the business.
Gu credited improvements in technology and marketing for driving contribution profit up 48% to $218 million. Contribution profit is the metric the company uses as its “north star,” and it strips out much of the noise in its financial reports. Contribution profit at Upstart is made up of revenue from fees minus costs from acquiring and servicing borrowers, and 48% growth in that category shows the company is executing its strategy effectively.
Acknowledging the macro headwinds facing the company, “I’m just so much more confident in the long term of the business, and that’s because ultimately the macro kind of comes and goes, but these technology and marketing wins that stack, that we’re making the rate at which we’re delivering them, those things are durable.”
3. Upstart is nearly as cheap as it’s ever been
On a price-to-sales basis, Upstart stock now trades at a multiple of 1.5, making it the cheapest it has ever been, with the brief exception at the end of 2022.
Back then, Upstart’s revenue was tumbling as interest rates rose and the business was in disarray. These days, the company is in a much different position, with revenue and profits growing steadily, despite interest rates remaining high and the Upstart Macro Index, which is at a similar level to where it was then, indicating an elevated default risk.
Upstart may have to deliver a few more quarters of this kind of contribution profit growth to give the stock a boost, but shares have a lot of upside potential over the long term, especially if the headwinds in the macro environment ease,
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Jeremy Bowman has positions in Upstart. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.
