Key Points
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Upstart beat expectations on the top and bottom lines.
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The company raised guidance for revenue from fees, but cut it for EBITDA, due to macro challenges.
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Upstart reported record contribution profit, which the company sees as its most important metric.
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Shares of Upstart Holdings (NASDAQ:UPST)were fluctuating in premarket trading after the AI-based loan originator beat expectations on the top and bottom lines in its third-quarter earnings report.
Upstart reported revenue growth of 34% to $370.5 million, ahead of the consensus at $363.7 million. Loan originations were up 44% year-over-year to $4.1 billion, though they declined sequentially, hinting at the macroeconomic headwinds facing the company. For Q3, loans originated rose 34% to 574,089.
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On the bottom line, contribution profit, the metric the company is most focused on, rose 48% to $218 million, reaching an all-time high. Contribution profit is essentially revenue from fees minus direct borrower acquisition and servicing costs, and gives a sense of the core profitability of the business before indirect expenses.
Generally accepted accounting principles (GAAP) earnings per share was $0.33, up from $0.23 in the quarter a year ago and beating estimates at $0.23.
Upstart’s guidance was mixed as it raised its full-year guidance for revenue from fees from $1.3 billion to $1.32 billion, though it cut adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from around $294 million to $260 million, reflecting the weakening macro environment and lower profits on non-core parts of the business, such as loans it holds on the balance sheet.
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Upstart is executing on its game plan
Upstart has struggled over the years to clearly communicate to investors what the business does and what the risks are, but the underlying operations have improved significantly in the last few years, as demonstrated by the record contribution profit. The company can’t control the aggregate demand for loans, nor can it control interest rates. However, it’s executing in the areas it does control, continuing to gain share of overall loan originations, and driving contribution margin higher.
Importantly, the company also recorded its first quarter of positive contribution margin in its secured loan business, which includes auto and home loans. That represents a massive, fast-growing market for Upstart. Secured originations jumped 194% to $587 million, with 3x growth in the auto market and 2x growth in the home market.
Originations in the secured market were flat sequentially, reflecting some of the macro challenges, but reaching a positive contribution profit in the segment is a major milestone and occurred one quarter ahead of the company’s goal.
Overall, Upstart is holding to its guidance to deliver compound annual revenue growth of 35% through 2028, and the improvement in profitability is a good sign for the long-term health of the business.
While the macro climate may put pressure on the business in the coming quarters, Upstart is demonstrating it can operate effectively in any environment. With the stock hovering at two-year lows, it offers a lot of upside potential from here if it can continue to grow contribution profit.
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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.
