Upstart's Enhanced Lending Model Drives Revenue Growth, Analyst Sees Further Upside Potential

Piper Sandler analyst Arvind Ramnani upgraded Upstart Holdings, Inc. UPST to Overweight from Neutral, raising the price forecast to $85 from $31.

According to the analyst, the company is benefiting from a more favorable interest rate environment, improved lending dynamics, and upgrades to its lending model.

The strong performance in the quarter was largely driven by enhancements in the lending model, along with the impact of lower interest rates, Ramnani writes.

In the third quarter, the company reported total revenue of $162 million, reflecting a 20% year-over-year increase and a 27% sequential jump.

The company posted a contribution margin of 61.1%, marking a 280 basis point improvement quarter-over-quarter. According to the analyst, this growth was driven by higher conversion rates on personal loans, thanks to enhancements in the lending model and greater automation efficiencies in the borrower onboarding process.

Also Read: Fed Cuts Interest Rates, But Inflation Remains Elephant In The Room

Ramnani also notes that the company's partnership with Blue Owl, which enables the purchase of $2 billion in loans over the next 18 months, is a significant positive development.

 With Blue Owl included, more than half of the company's loan funding now comes from committed capital, adding stability to its business model. Management has also indicated ongoing discussions with potential partners, which could further strengthen its lending capabilities.

These positive developments were evident in the third-quarter performance, and Ramnani forecasts further upside as the impact of interest rate cuts continues to be reflected in the company's business model.

The analyst raised the revenue forecast for FY24 to $597.7 million from $565.8 million. The revenue forecast for FY25 raised to $789.9 million from $682.8 million.

Price Action: UPST shares are trading higher by 42.9% to $79.24 at last check Friday.

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