Upstart Holdings, Inc. Navigates Challenging Macroeconomic Conditions

Upstart Holdings, Inc., a leading artificial intelligence (AI) lending platform, has weathered a turbulent economic environment in recent years, showcasing the resilience of its business model. The company’s financial report for the years ended December 31, 2022, 2023, and 2024 provides insights into its performance, challenges, and strategies for the future.

Financial Performance Overview

Upstart’s primary revenue streams come from platform and referral fees, as well as servicing and other fees. In 2024, the company reported total revenue of $636.5 million, a 24% increase from the previous year. This growth was driven by a 59% increase in Transaction Volume, Number of Loans, which reached 697,092 in 2024.

The company’s Contribution Margin, a non-GAAP metric that measures the profitability of its core business, remained strong at 60% in 2024, despite the challenging macroeconomic conditions. Adjusted EBITDA, another non-GAAP measure, improved from a loss of $17.2 million in 2023 to a profit of $10.6 million in 2024, reflecting the company’s efforts to streamline operations and control costs.

However, Upstart’s net loss widened from $240.1 million in 2023 to $128.6 million in 2024, primarily due to increased operating expenses, including higher sales and marketing costs, as well as expenses related to the company’s product development initiatives.

Navigating Macroeconomic Challenges

A key factor affecting Upstart’s performance was the impact of macroeconomic conditions, particularly the rise in interest rates and volatility in credit markets. These changes led to increased delinquencies, defaults, and bankruptcies among borrowers, resulting in higher charge-offs and fewer recoveries for loans facilitated on Upstart’s platform.

To address these challenges, Upstart introduced the Upstart Macro Index (UMI) in 2023, which estimates the impact of macroeconomic changes on the credit performance of its unsecured personal loans. The UMI reached approximately 1.40 as of December 31, 2024, indicating that current macroeconomic conditions contributed an incremental 40% risk to the repayment performance of Upstart-powered loans compared to a benign credit environment.

In response to the constrained loan funding environment, Upstart utilized its balance sheet to support short-term funding requirements for loans that would otherwise be purchased and held by institutional investors or securitized. The company also secured several committed capital and co-investment arrangements with institutional investors and lending partners to diversify its sources of loan funding.

Continued Improvements to AI Models

Upstart’s historical growth has been driven by improvements to its AI models, which benefit from a “flywheel effect” as the accumulation of repayment data leads to improved accuracy of risk and fraud predictions. This, in turn, results in higher approval rates, lower interest rates, and increased transaction volume, further fueling the growth of the company’s data set.

The company continues to invest significantly in the development of its AI models and platform functionalities, with the goal of expanding access and lowering rates for creditworthy borrowers. These efforts have contributed to an increase in the Percentage of Loans Fully Automated, which reached 91% in 2024, up from 87% in the previous year.

Product Expansion and Innovation

Upstart has been actively expanding its product offerings, introducing new unsecured personal loans for small-dollar borrowers in 2022, launching a HELOC product in 2023, and adding auto-secured personal loans in 2024. While these new products have not yet achieved positive unit economics, the company views them as important growth opportunities that leverage its evolving AI technology.

The introduction of these new products, however, has also resulted in increased expenses to support their launch and early loan originations. The company’s management has indicated that the monetization prospects for these new offerings are uncertain, and the associated costs may weigh on its top-line growth and profitability in the near term.

Key Operating and Financial Metrics

Upstart closely monitors several key operating and non-GAAP financial metrics to gauge the performance of its business and guide its strategic direction:

Transaction Volume, Dollars and Number of Loans Transaction Volume, Dollars increased by 28% in 2024 compared to the prior year, while Transaction Volume, Number of Loans increased by 59%. These increases were primarily driven by model improvements and product initiatives, which resulted in more qualified borrowers and more attractive loan offers.

Conversion Rate Upstart’s Conversion Rate, which measures the ratio of Transaction Volume, Number of Loans to the number of rate inquiries, increased from 9.7% in 2023 to 16.5% in 2024. This improvement was driven by underwriting model enhancements and product initiatives, coupled with continued optimization in the company’s acquisition channels.

Percentage of Loans Fully Automated The Percentage of Loans Fully Automated, which reflects the level of automation in Upstart’s loan application and origination process, increased from 87% in 2023 to 91% in 2024, demonstrating the company’s continued progress in streamlining its operations.

Contribution Profit and Contribution Margin Upstart’s Contribution Profit, a non-GAAP measure that subtracts borrower acquisition and verification costs from revenue, increased from $353.3 million in 2023 to $381.5 million in 2024. Contribution Margin remained strong at 60% in 2024, despite the challenging macroeconomic environment.

Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA, a non-GAAP measure that excludes the impact of certain expenses, improved from a loss of $17.2 million in 2023 to a profit of $10.6 million in 2024. Adjusted EBITDA Margin also increased from -3% in 2023 to 2% in 2024, reflecting the company’s efforts to control costs and streamline operations.

Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share Upstart reported an Adjusted Net Loss of $17.8 million in 2024, compared to an Adjusted Net Loss of $46.9 million in the previous year. Adjusted Net Income (Loss) Per Share improved from a loss of $0.56 in 2023 to a loss of $0.20 in 2024.

Liquidity and Capital Resources

As of December 31, 2024, Upstart had $788.4 million in unrestricted cash and cash equivalents, as well as $5.0 million in investments in certificates of deposit. The company also has access to $475.0 million in warehouse credit facilities for unsecured personal loans, $100.0 million for small-dollar loans, and $50.0 million for auto loans.

To finance its operations and loan purchases, Upstart relies on a combination of its cash reserves, warehouse credit facilities, and the issuance of convertible senior notes. The company’s convertible senior notes have an aggregate principal balance of $1,230.4 million and mature between 2026 and 2030.

Upstart’s management believes that its current cash and cash equivalents, along with the available funding sources, will be sufficient to meet its liquidity needs for at least the next 12 months. However, the company’s future capital requirements will depend on various factors, including revenue growth, working capital needs, and capital expenditures. If necessary, Upstart may raise additional capital through the sale of equity, equity-linked, or debt securities, or other debt financing arrangements.

Composition of Balance Sheet Loan Portfolio

As of December 31, 2024, Upstart held $806.3 million in loans on its consolidated balance sheet. Of these, $455.2 million were originated for research and development purposes, primarily in support of the company’s auto lending products, HELOCs, and the expansion of its unsecured personal loan product. The remaining $351.1 million consisted of core personal loans, with $248.2 million held for potential sale to institutional investors and $102.9 million held by the consolidated securitization.

Upstart plans to continue utilizing its capital to support research and development activities and, at times, as a funding source for core personal loans during periods of marketplace funding constraints. The company intends to sell loans held on its balance sheet to institutional investors over time through secondary sales or securitizations.

Risks and Outlook

Upstart’s financial performance and future growth are subject to several risks and uncertainties, including:

1. Macroeconomic Conditions: The company’s business is highly sensitive to changes in interest rates, credit market volatility, and overall economic conditions, which can impact loan funding, borrower demand, and credit performance.

2. Lending Partner and Institutional Investor Participation: Disruptions in the banking sector or reduced participation by lending partners and institutional investors could adversely affect Upstart’s ability to fund loans and acquire new customers.

3. Product Expansion and Monetization: The company’s efforts to expand its product offerings may result in increased expenses and uncertain monetization prospects, which could weigh on its top-line growth and profitability.

4. Regulatory and Compliance Risks: As a financial technology company, Upstart is subject to evolving regulatory requirements and scrutiny, which could impact its operations and financial performance.

Despite these challenges, Upstart remains focused on leveraging its AI-powered technology, expanding its product suite, and diversifying its funding sources to navigate the current macroeconomic environment and position the company for long-term success. The company’s continued investments in its AI models, product development, and operational efficiency are expected to be key drivers of its future growth and profitability.