Upstart's AI Lending Model Faces Its Toughest Test if Rates Stay High
Key Points
Upstart’s business was nearly derailed by soaring interest rates in 2022 and 2023.
It’s learned from its past mistakes, but higher rates could still throttle its growth.
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Upstart (NASDAQ: UPST), an AI-powered online lending marketplace, went public at $20 in Dec. 2020. It soared to a record high of $390 in Oct. 2021, but it now trades at about $31. Let's see why Upstart's stock pulled back -- and why it could struggle if interest rates stay high.
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Why is Upstart dependent on low interest rates?
Upstart isn't a traditional lender. It's an AI-powered middleman that approves loans for banks, credit unions, and auto dealerships. Rather than analyzing traditional data like an applicant's credit score, credit history, or annual income, Upstart reviews non-traditional data points -- including previous jobs, standardized test scores, and GPAs -- to approve a wider range of loans for younger and lower-income applicants with limited credit histories. It generates most of its revenue by taking a referral fee on each approved loan.
Upstart's growth can be gauged by its originated loans, conversion rate (the percentage of inquiries that lead to approved loans), contribution margin (the percentage of its fees it retains as revenue), and total revenue growth. Its business flourished in 2020 and 2021, when interest rates were near zero, but floundered in 2022 and 2023 after the Fed's 11 consecutive rate hikes.
|
Metric |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
|---|---|---|---|---|---|---|
|
Originated Loans Growth |
40% |
338% |
(5%) |
(59%) |
28% |
115% |
|
Conversion Rate |
15.2% |
24% |
14.1% |
9.7% |
15.1%* |
19.4% |
|
Contribution Margin |
46% |
50% |
49% |
63% |
60% |
56% |
|
Revenue Growth |
42% |
264% |
(1%) |
(39%) |
24% |
64% |
Data source: Upstart. *Retroactively adjusted in 2025.
In 2024 and 2025, Upstart's growth accelerated again after six interest rate cuts. But in 2026, the Fed left its rates unchanged at 3.50%-3.75% through four Federal Open Market Committee (FOMC) meetings. With inflation hitting a three-year high in May, many analysts now anticipate rate hikes instead of rate cuts in the second half of the year.
What's next for Upstart?
In its first-quarter report in early May, Upstart reiterated its prior outlook for 40% revenue growth in 2026 and a 35% CAGR from 2025 to 2028. It also expects its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin to improve from negative 21% in 2026 to positive 25% in 2028. That's an optimistic outlook, but its stock has declined nearly 50% over the past 12 months, presumably because investors are bracing for rate hikes.
Upstart is in a stronger position than it was back in 2022 and 2023, thanks to more than $4 billion in committed forward-flow capital from alternative asset managers. Even if interest rates rise, those institutions are obligated to keep buying Upstart's loans for up to 24 months. It also generates more of its revenue from secure, collateralized auto and HELOC loans rather than the unsecured personal loans that nearly sank its business three years ago.
With an enterprise value of $3.4 billion, Upstart still looks cheap at three times this year's sales. Unfortunately, it will remain out of favor until the fear of interest rate hikes subsides.
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Leo Sun 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.
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