Upstart, a lending marketplace powered by artificial intelligence (AI), recorded a significant drop in its stock price of 14.8% following the release of its third-quarter earnings report. This sharp decline was not due to poor profits, but instead caused by the behavior of its AI model, which intentionally tightened credit policies, leading to lower loan origination volume than predicted.
Understanding Upstart’s Stock Decline
Despite a strong profitability report that surpassed analyst expectations, the market responded unfavorably to Upstart’s disappointing loan origination volume and cautious guidance for the remainder of the year. Upstart’s stock, which closed at $46.24 per share on Tuesday, opened trading on Wednesday at $39.38. Since the beginning of the year, the company’s stock has been under pressure, witnessing a decline of 35.7%.
Market analysts have attributed the stock’s performance to uncertainties surrounding the effectiveness of Upstart’s underwriting model and lower forward-looking expectations. However, it’s worth noting that Upstart, which had been unprofitable for 12 consecutive quarters, was successful in breaking this trend in August.
In the third quarter, Upstart generated a net income of $32 million, exceeding the analyst consensus of $10.2 million. This was a significant improvement compared to the net loss of $6.8 million reported in the same quarter last year. The company’s net income translated to a diluted earnings per share (EPS) this quarter of $0.23, compared to the consensus of $0.08.
Loan Originations Fell Short of Expectations
Upstart’s loan origination volume for the quarter was approximately $2.9 billion, which missed the consensus expectation of $3.3 billion, according to Jefferies analysts. The company’s AI models intentionally slowed lending activity due to mixed risk indicators, as explained by the company’s leadership.
Paul Gu, Upstart’s Chief Technology Officer, revealed during the earnings call that the AI model detected macroeconomic stresses during the summer, causing it to tighten the credit box. Despite this, consumer demand for loans grew rapidly, with application submissions reaching the highest level in over three years. However, the company’s conversion rate fell from 23.9% in the previous quarter to 20.6% in Q3, reflecting a decrease in the number of loans approved, but not their dollar value.
The AI Model’s Overreaction
CEO Dave Girouard admitted that the AI model overreacted to macro conditions, describing the situation as a “speed bump”. He assured investors that an overreacting model is preferable to one that underreacts, as it can revert to normal operations. However, analysts from Jefferies found the company’s explanation “confusing”.
Analysts Question Upstart’s Underlying Performance
David Scharf, Managing Director of Equity Research at Citizens Bank, questioned the differentiation of Upstart’s model compared to other machine learning-based lenders. Upstart has marketed its underwriting models as a differentiator, but the recent events have led to increased uncertainty regarding the company’s ability to deliver industry-leading risk-adjusted yields to investors in its loans.
Upstart’s revenue of $277 million missed the analyst consensus of $280 million by a small margin. Scharf and his team at Citizens Bank expect these trends to continue into next year, potentially impacting bottom-line performance. Consequently, the bank slightly adjusted its estimate for Upstart’s 2026 performance, lowering its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) estimate from $316 million to $313 million.
Despite the challenges, Upstart remains focused on its long-term strategy. “In Q3, we continued to execute on our 2025 game plan of rapid growth, profitability, and AI leadership — all anchored in exceptional credit performance,” said Upstart’s CEO, Dave Girouard.
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