91% of Upstart's Loans Were Fully Automated Last Quarter. No Bank Can Underwrite That Cheaply.

Upstart (NASDAQ: UPST) has had its share of ups and downs since the fintech went public in late 2020. The company, which uses artificial intelligence (AI) to process loan requests, is currently in a downward trend, with the stock price sliding about 31% year to date.

But there are some promising trends, illuminated in its recent second-quarter earnings, that bear watching. Let's look at them.

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The advantages of the AI lending platform

Upstart delivered strong results in Q2, beating estimates with revenue up 42% year over year to $365 million and net income jumping 195% to $16.5 million.

The positive net income marked a return to profitability for Upstart after a $7 million net loss in the first quarter. But Upstart has been fairly consistently profitable over the past year, with positive net income in four of the past five quarters.

Also, Upstart originated $4.2 billion in loans in Q2, up 50% year over year. It converted 19.7% of loan inquiries, down from 21.7% in the same quarter a year ago. And 91% of the loans it processed were fully automated, done in seconds by AI.

This provides a huge advantage for Upstart that other banks can't match. The key statistic is the contribution margin. This a metric that examines how much profit Upstart makes on every $1 it lends, after subtracting all costs to process that loan.

In Q2, Upstart generated a record $193 million in contribution profit, up 38% year over year. The contribution margin was 55%, down from 58% in the same quarter a year ago. The fact that 91% of the loans are processed quickly with no human intervention drives up that contribution margin and will continue to do so.

That high contribution profit can then be used to invest back in the technology and other resources or pay down debt. Overall, it just improves the financials for the growing company.

New bank charter to improve unit economics

The other trend Upstart is seeing is that its revenue gains are outpacing its operating expenses, resulting in a higher operating margin. In Q2, its operating profit increased 224% to $14.6 million and its operating margin jumped from 2% to 4%.

These trends are all pointing Upstart toward increased earnings. For the full year, Upstart anticipates $1.4 billion in revenue, up from $1 billion in 2025 and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $294 million, up from $230 million last year.

Last month, Upstart received approval for a national bank charter and expects to launch its bank in early 2027. This will allow Upstart to collect deposits, which will, in turn, lower its cost of lending. Currently, Upstart pays fees to third-party banks to originate loans, but once it launches its own bank, it will eliminate some of those fees, further improving its contribution margin and unit economics.

Upstart stock is still not cheap, with a forward P/E of 47. However, Wall Street is fairly bullish on its growth with a median price target of $39.50, suggesting 30% upside. Upstart may not be a strong buy right now, but it is moving in the right direction and could start to take off once it gets its bank charter.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.