Upstart Holdings (UPST -2.77%) was one of the hottest tech stocks last year. The cloud-based lending platform provider went public at $20 per share in December 2020, and its stock started trading at $26. It skyrocketed to an all-time high of $390 last October, but now trades back at about $26 again.

Should investors buy Upstart after that wild round trip? Let's take a fresh look at its business, growth rates, and valuation to decide.

A couple fills out paperwork to take out a loan.

Image source: Getty Images.

What does Upstart do?

To approve loans, financial institutions typically analyze a customer's FICO score, credit report, and annual income to gauge creditworthiness. Upstart goes a step further by gathering additional data -- including a customer's educational history, area of study, GPA, standardized test scores, and work history -- to create a more comprehensive lending profile.

Upstart processes that data with its cloud-based artificial intelligence (AI) platform, then partners with banks, credit unions, and auto dealerships to provide personal loans. It claims its approach is less discriminatory against younger customers who haven't had a chance to build up high credit scores. It also streamlines the byzantine application process for personal loans with a single-page application that can be completed in about five minutes.

Upstart's loans range from $1,000 to $50,000, with APRs between 6.5% to 35.99%, and typically last between three and five years. It doesn't fund the loans on its own -- it's merely an intermediary service that matches loans from banks and institutional investors to individual borrowers. Therefore, it generates nearly all of its revenue from the transaction fees that it charges for those services.

How fast is Upstart growing?

At the time of its IPO, Upstart only worked with 10 lenders. It ended its latest quarter with over 500 auto dealerships and 57 banks and credit unions, and it continued to add about a lender a week.

Upstart's core growth can be gauged by the total number of loans processed by its bank partners and its conversion rate, or the percentage of its inquiries that are converted into actual loans. Both metrics have been headed in the right direction over the past three years.





Bank partner loans




Growth (YOY)




Conversion rate




Data source: Upstart. YOY = year over year.

In the first quarter of 2022, Upstart's loans rose another 174% year over year to 465,537, but declined sequentially from 495,205 loans in Q4 2021. Its conversion rate also fell to 21%.

Upstart blamed that slowdown on rising interest rates, which are causing consumers to take out fewer loans, and other macroeconomic headwinds. Since Upstart isn't actually a bank, it can't reap the benefits from higher interest rates like growing savings accounts and more profitable loans.

How bad will its slowdown be?

Upstart's growth accelerated significantly in 2021 as it more than quadrupled its number of loans. Its contribution margin, which measures the margins of its fees after deducting costs directly related to collecting those fees, also expanded along with its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margins.






$159.8 million

$233.4 million

$848.6 million

Growth (YOY)




Contribution margin




Adjusted EBITDA

$5.6 million

$31.5 million

$231.9 million

Growth (YOY)




Adjusted EBITDA margin




Data source: Upstart. *Adjusted EBITDA was negative in 2018.

In the first quarter of 2022, Upstart's revenue rose 156% year over year to $310 million -- but only grew 2% sequentially -- as its contribution margin dipped both year over year and sequentially to 47%. Its adjusted EBITDA margin rose 3 percentage points year over year to 20%, but that also represented a steep sequential drop from 30% in the prior-year quarter.

It attributed its margin contraction to the expansion of its auto lending business, which CFO Sanjay Datta called "contribution-negative at this early stage" during the company's latest conference call.

Upstart released its preliminary second-quarter results on July 7. It now expects its revenue to rise just 18% year over year, compared to its prior forecast for 52%-57% growth, with a contribution margin of 47%, which is slightly higher than its previous guidance of 45%.

In a statement, CEO Dave Girouard said that "inflation and recession fears have driven interest rates up and put banks and capital markets on cautious footing," and that its marketplace faced "constrained" funding as its lenders exercised more caution in a tougher macro environment.

Is Upstart too cheap to ignore?

Analysts expect Upstart's revenue to rise 27% to $1.08 billion this year, but for its adjusted EBITDA to decline 42% to $134 million.

Based on those expectations, Upstart trades at just two times this year's sales and 16 times this year's adjusted EBITDA, which makes it seem cheap relative to its long-term growth prospects. However, that discount also suggests it will struggle with higher interest rates for the foreseeable future. Upstart stock might be worth nibbling on, but investors shouldn't take a larger position until the macro situation improves.