We came across a bullish thesis on Upstart Holdings, Inc. (UPST) on Substack by Unconventional Value. In this article, we will summarize the bulls’ thesis on UPST. Upstart Holdings, Inc. (UPST)’s share was trading at $55.48 as of March 6th. UPST’s forward P/E was 57.80 according to Yahoo Finance.
Rawpixel.com/Shutterstock.com
Upstart is a company that thrives on volatility, with a revenue trajectory that has swung dramatically in recent years. While its revenue has declined 30% over the past two years, it has still compounded at an impressive 32% annually over five years. The company’s core thesis is built on AI-driven disruption in credit markets, similar to Pagaya. Upstart’s proprietary AI models match borrowers with capital providers, continually refining their risk assessment through a growing dataset. As these models learn and improve, Upstart’s ability to offer better lending solutions strengthens, reinforcing a network effect that increases its competitive moat.
Upstart’s core business engine is a collection of AI models that automate the entire lending process, from sourcing to servicing loans. The company’s mission is to make credit more accessible and affordable, which is both a massive opportunity and a significant challenge in the highly cyclical credit industry. Over the last two years, Upstart has aggressively refined its AI models, increasing the number of data features by 67% and expanding its repayment dataset by nearly 4x. These advancements have made the company’s models significantly better at predicting default risk, creating a competitive advantage that is difficult to replicate. Unlike other AI applications, credit lending requires solving a time-series problem—an iterative learning process that demands real-world loan issuance and observation over time. Upstart’s ability to refine its models through this approach has given it a unique position in the market.
Despite macroeconomic headwinds, Upstart is entering 2025 in growth mode. The company grew fee revenue by 13% and contribution profit by 8% in 2024, and management projects 45% and 37% growth, respectively, for 2025. Historically, Upstart has demonstrated rapid expansion when economic conditions are favorable, and its ongoing improvements in AI risk assessment position it well for the next growth cycle. Upstart’s management has also refined its approach to macroeconomic shifts, prioritizing rapid adaptation over prediction. Had its current macro tools been in place earlier, the company estimates it could have avoided 55% of excess defaults during prior downturns and recalibrated its models a full year sooner.
Looking ahead, Upstart’s ability to return to its prior scale depends on both macroeconomic conditions and the strength of its AI models. While a lower-risk environment would accelerate growth, the company believes its significantly improved risk separation capabilities will allow it to scale even in a less favorable climate. Additionally, Upstart’s business model is now structurally stronger, and management expects contribution margins to remain elevated compared to prior cycles. If macro conditions improve, the company is well-positioned for significant upside, offering investors a compelling opportunity with a clear path to sustained growth.
Upstart Holdings, Inc. (UPST) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 39 hedge fund portfolios held UPST at the end of the third quarter which was 29 in the previous quarter. While we acknowledge the risk and potential of UPST as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than UPST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.