Executive Summary / Key Takeaways

• AI-Powered Resurgence: Upstart has achieved a remarkable turnaround, delivering triple-digit revenue growth and returning to GAAP profitability in Q2 2025, a quarter ahead of schedule, primarily driven by continuous advancements in its proprietary AI models and operational automation.
• Diversified Growth Engines: Beyond its core personal loan product, Upstart's newer segments—Auto, Home Equity Line of Credit (HELOC), and Small Dollar Loans—are experiencing explosive sequential growth, significantly expanding the company's total addressable market and contributing a growing share of new borrowers.
• Strengthened Funding Ecosystem: The company has successfully built a more resilient and diversified funding supply through strategic committed capital partnerships, including significant deals with Fortress and Blue Owl (OWL), reducing reliance on its balance sheet for new product incubation.
• Technological Moat Deepens: Upstart's relentless innovation in AI, exemplified by Model 22's enhanced accuracy, the introduction of embeddings, and rapid automation across product lines, creates a formidable competitive advantage in risk assessment and borrower experience.
• Conservative Outlook Amidst Opportunity: While maintaining a conservative macro outlook (stable UMI, no Fed rate cuts assumed), management's guidance for full-year 2025 projects continued revenue growth and sustained GAAP profitability, driven by internal execution and technological leadership.

The AI Foundation for Credit: Upstart's Transformative Journey

Upstart Holdings, Inc. was founded in 2012 with an ambitious mission: to revolutionize consumer credit underwriting through artificial intelligence and cloud applications. Operating from San Mateo, California, the company set out to create an AI lending marketplace that would connect consumers with lending partners, offering more affordable and frictionless credit by leveraging data beyond traditional FICO scores. This vision has positioned Upstart as a unique player in the vast, multi-trillion-dollar credit origination industry, a market ripe for AI-driven disruption.

The company's journey has been marked by strategic evolution and resilience. After its IPO in 2020, Upstart expanded into auto lending with the acquisition of Prodigy in 2021. However, 2022 brought significant macroeconomic headwinds, including rising interest rates and constrained institutional funding, which challenged its growth trajectory. In response, Upstart strategically pivoted, introducing the Upstart Macro Index (UMI) to better quantify and adapt to market risks, and actively pursuing committed capital partnerships to stabilize its funding supply. This adaptive strategy laid the groundwork for a powerful resurgence, culminating in a return to robust growth and profitability in 2025.

Upstart's core strategy revolves around its "best rates, best process for all" mantra. This means not only having the most accurate AI models and highest levels of automation but also fueling them with the most efficient capital to deliver consistently superior loan products. The company's competitive landscape is diverse, ranging from traditional banks like JPMorgan Chase (JPM) and Bank of America (BAC) to fintech lenders such as LendingClub , SoFi , Affirm (AFRM), Rocket Companies (RKT), and OneMain Holdings (OMF). While these competitors offer various lending and financial services, Upstart differentiates itself through its specialized, deep AI underwriting capabilities and its unique bank partnership model.

Unpacking Upstart's AI Advantage: A Deep Dive into Technological Differentiation

At the heart of Upstart's investment thesis lies its proprietary AI technology, which serves as its most significant competitive moat. This technology is not merely an enhancement but a fundamental re-architecture of credit assessment, delivering tangible and quantifiable benefits across its platform.

Upstart's AI models continuously evolve, demonstrating remarkable improvements in accuracy and efficiency. Model 22, launched in early May 2025, represents a significant leap, utilizing neural networks at every level of its architecture. This innovation increased Upstart's separation accuracy advantage over a benchmark textbook credit model by 17 percentage points, reaching an impressive 171.2%. Such precision allows Upstart to more accurately identify and price risk, leading to lower default rates for its partners and more competitive rates for borrowers.

Automation is another critical pillar of Upstart's technological differentiation. The company achieved an all-time high of 92% of loans fully automated in Q1 2025, meaning the entire process from rate request to loan closing is handled by AI with no human intervention. This automation drastically reduces origination costs and accelerates the borrower experience. For instance, in Q1 2025, Upstart celebrated the first instant approval of an auto refinance loan, completed in a single session of just 9 minutes. Similarly, its HELOC product launched instant property verification in Q2 2025, allowing the first applicant to complete the entire verification process in under 1 minute. This speed and efficiency in traditionally slow, manual processes are unprecedented in the industry.

The adaptability of Upstart's models to changing macroeconomic conditions is also a key differentiator. Innovations like Model 18, which incorporates the loan's Annual Percentage Rate (APR) as an input, and Model 19, which introduced the Payment Transition Model (PTM) to consider intermediate delinquency states, enable the models to adjust quickly and accurately. A back-test revealed that applying today's macro handling tools would have avoided 55% of excess loan defaults observed during the intense macro volatility of 2021-2023, demonstrating the models' enhanced resilience.

Furthermore, Upstart is generalizing its AI capabilities across product verticals. The introduction of "embeddings" to its core personal loan underwriting model in Q1 2025 allows the AI to convert complex, unstructured data into valuable model inputs, uncovering subtle patterns that improve accuracy and generalization. This approach means that all Upstart loan products can learn from repayment patterns observed across the entire platform, not just within individual categories. The auto lending segment, for example, is the first to leverage a foundational credit model trained on multi-category data, then fine-tuned for auto-specific applications.

Upstart's R&D initiatives are ambitious, with a stated goal to "10x our leadership in AI" in 2025. This includes strengthening the team, improving infrastructure, streamlining processes, and accelerating the growth of proprietary training data. The company is also actively exploring generative AI, with 60% of its developers using LLM-powered tools and over 700 custom GPTs built for internal workflows. Borrower-facing generative AI tools for model explainability and customer service are already launched, with an eye towards "agentic management of our consumers' credit needs."

For investors, these technological advancements translate directly into a stronger competitive moat, superior financial performance, and enhanced market positioning. The ability to accurately price risk and automate processes leads to lower costs, better margins, and the capacity to serve a broader range of borrowers. This technological edge is foundational to Upstart's long-term growth strategy and its aspiration for market share leadership across all product categories.

Financial Momentum and Expanding Horizons

Upstart's financial performance in Q2 2025 showcased a significant inflection point, marking a return to robust growth and profitability. Total revenue for the quarter reached approximately $257.3 million, a remarkable 102% increase year-over-year. This surge was primarily driven by revenue from fees, which hit $240.8 million, up 84% year-over-year. Crucially, the company achieved GAAP net income of approximately $5.6 million, its first positive GAAP net income since Q2 2022, a quarter earlier than anticipated. Adjusted EBITDA for Q2 2025 stood at $53 million, with an Adjusted EBITDA margin of 21%, reflecting strong operating leverage.

The growth is not confined to its core personal loan product. Upstart's diversification strategy is yielding impressive results across its segments:

• Personal Lending: Originations in Q2 2025 reached $2.8 billion, the highest volume in three years. The conversion rate, a key indicator of model effectiveness, climbed to 24% in Q2 2025 from 19% in Q1 2025. The T-Prime program, targeting super prime borrowers (those with FICO scores over 720), accounted for 32% of Q1 2025 originations, demonstrating the platform's expanding reach across the credit spectrum.
• Auto Lending: This segment is rapidly scaling, growing 87% sequentially in Q2 2025 and crossing $100 million in quarterly originations. The Auto Retail product, in particular, is gaining significant traction, with dealership adoption and loan volume on a steep climb.
• Home Lending (HELOC): Upstart's newest product is maturing quickly, with originations growing 67% sequentially in Q2 2025 and expected to cross $100 million soon. The product is now live in 37 states plus Washington D.C., covering almost 75% of the U.S. population. Notably, over a thousand HELOCs have been originated with zero defaults by Q4 2024, and the first lending partner agreement in Q4 2024 improved best HELOC rates by approximately 100 basis points.
• Small Dollar Loans (SDL): This product continues its strong performance, growing 40% sequentially in Q2 2025 and also crossing $100 million in quarterly originations. SDLs serve as a critical customer acquisition tool, accounting for nearly 16% of new borrowers in Q1 2025, and provide valuable data for training Upstart's broader AI models.

Loan servicing and collections, while less visible, are becoming a significant competitive differentiator. Servicing and other fees contributed $37.9 million in Q2 2025, up 19% year-over-year. Through machine learning and automation, Upstart has reduced year-over-year population-adjusted delinquency rates by 20% and raw delinquency rates by 32% in Q2 2025. Automation reduced people-related costs per current loan by 50% over 2024, and AutoPay enrollment exceeded 80% portfolio-wide.

Capital Strength and Future Outlook

Upstart's liquidity and capital resources have been strategically strengthened to support its rapid growth. The company aims for a balanced funding strategy, combining originations from bank and credit union partners, large-scale committed capital partnerships, and opportunistic securitization markets. Committed capital now constitutes well over 50% of the funding on its platform, providing resilience in uncertain market conditions. Recent significant partnerships include a $1.2 billion forward-flow commitment from Fortress Investment Group and a $2 billion loan purchase agreement over 18 months with Blue Owl's Adalia affiliate. In June 2025, Upstart also entered into a $100 million risk retention financing facility and successfully closed its second ABS deal of 2025 with improved execution and broader investor participation.

While the company's balance sheet usage temporarily expanded in Q2 2025 to incubate new products, the objective remains to transition most of this funding to third-party capital by the end of 2025. Unrestricted cash stood at $395.9 million at the end of Q2 2025.

For Q3 2025, Upstart projects total revenues of approximately $280 million, with revenue from fees at $275 million and net interest income around $5 million. Contribution margin is expected to be approximately 58%, with GAAP net income of $9 million and Adjusted EBITDA of $56 million. The full-year 2025 guidance has been raised, with total revenues now expected to be approximately $1.055 billion (up from $1.01 billion), revenue from fees at $990 million (up from $920 million), and Adjusted EBITDA margin around 20% (up from 19%). GAAP net income for the full year is projected to be approximately $35 million (up from at least breakeven).

These projections are based on conservative macroeconomic assumptions, including a steady environment with the UMI remaining in the 1.4 to 1.5 range, stable interest rate levels, and a resilient labor market. Management explicitly does not assume any Fed rate cuts, viewing them as potential upside. The guidance primarily reflects the company's confidence in its internal model improvements and operational efficiencies.

Competitive Dynamics and Risk Considerations

Upstart operates in a fiercely competitive consumer lending market. Its primary competitive advantage lies in its AI technology, which enables superior risk assessment and automation compared to many rivals. While traditional banks and larger fintechs like LendingClub (LC) and SoFi offer broader product suites or established customer bases, Upstart's AI allows it to serve a wider range of borrowers more efficiently and at more competitive rates. Its "best rates, best process for all" strategy, coupled with its T-Prime program, directly challenges competitors across the credit spectrum. Upstart's distributed funding model, leveraging both bank deposits (via partners) and private credit, positions it to compete effectively even against deposit-funded lenders like SoFi (SOFI).

However, Upstart faces several pertinent risks. Macroeconomic conditions, particularly sustained high interest rates or a reacceleration of inflation, could impact borrower demand and credit performance. The UMI, while stable, remains elevated, indicating a higher default environment. The effectiveness of Upstart's AI models, though continuously improving, is paramount; any failure to accurately predict creditworthiness or adapt to unforeseen economic shifts could lead to higher losses and reputational damage.

The company's increasing reliance on its balance sheet for incubating new products, while strategic, exposes it to greater credit and liquidity risk, with a maximum exposure of approximately $660.2 million under committed capital arrangements as of Q2 2025. The evolving regulatory landscape for AI and "true lender" challenges also poses a significant risk, potentially leading to increased compliance costs or restrictions on its business model. Furthermore, the highly automated nature of its platform could make it a target for sophisticated fraudulent activity.

Conclusion

Upstart Holdings, Inc. has demonstrated a powerful resurgence, driven by its unwavering commitment to AI innovation and strategic diversification. The return to GAAP profitability and triple-digit revenue growth in Q2 2025, coupled with the explosive expansion of its Auto, Home, and Small Dollar Loan segments, underscores the efficacy of its AI-first approach. Upstart's technological leadership, manifested in increasingly accurate models and unparalleled automation, is deepening its competitive moat, enabling it to offer superior products and experiences across the credit spectrum.

While macroeconomic uncertainties and regulatory scrutiny remain persistent challenges, Upstart's proactive funding strategy and conservative planning assumptions provide a resilient foundation. The company's vision of building the "foundation model for credit" and becoming the "always-on everything store for credit" is not merely aspirational but is being systematically executed through concrete technological and operational advancements. For discerning investors, Upstart represents a compelling opportunity to participate in the transformative power of AI in financial services, with a clear trajectory toward sustained growth and profitability, driven by its unique ability to deliver the best rates and best process to all Americans.