UPST Q2 Deep Dive: AI Model Rollouts Drive Growth, But Profitability and Funding in Focus

AI-powered lending platform Upstart (NASDAQ:UPST) reported Q2 CY2025 results beating Wall Street’s revenue expectations, with sales up 102% year on year to $257.3 million. On top of that, next quarter’s revenue guidance ($280 million at the midpoint) was surprisingly good and 3.9% above what analysts were expecting. Its non-GAAP profit of $0.36 per share was 41.6% above analysts’ consensus estimates.

Is now the time to buy UPST? Find out in our full research report (it’s free).

StockStory’s Take

Upstart’s second quarter results for 2025 exceeded Wall Street’s revenue and profit expectations, but the market responded negatively. Management attributed the strong top-line growth to the rollout of Model 22, which leveraged advanced neural networks to improve loan conversion rates and underwriting accuracy. CEO Dave Girouard emphasized that growth was not a result of macroeconomic improvement, but rather “primarily on the back of model improvements,” leading to record originations and the highest volume seen in three years. Despite rapid expansion in new business lines such as Home and Auto, management noted that scaling these products required significant investments, which impacted the overall margin profile.

Looking forward, management raised full-year revenue guidance, expressing confidence in continued growth for both core and emerging lending products. CFO Sanjay Datta explained that the outlook remains based on a steady macro environment, with expectations for further enhancements to AI-driven credit models and operational efficiencies. Girouard described the company’s priority as “persistently underwriting 100% of Americans with the best credit products in the world just a click away.” While Home and Auto segments are projected to accelerate, management acknowledged that transitioning funding for these products off the balance sheet remains a key risk and focus for the remainder of the year.

Key Insights from Management’s Remarks

Management attributed Q2’s outperformance to advancements in AI-driven credit models, operational cost efficiencies, and strong sequential growth in new lending products. The call also highlighted the transition challenges as emerging segments scale and require new funding strategies.

• AI model advancements: The introduction of Model 22, which uses neural networks throughout its architecture, drove significant increases in loan conversion rates and underwriting precision. CTO Paul Gu noted that this innovation boosted the platform’s ability to separate high-quality borrowers, reducing inaccuracy and supporting higher originations.

• Emerging products scaling: Home and Auto lending experienced rapid sequential growth, with originations up 87% and 67% respectively. Management credited product-specific automation—such as instant property verification in Home and online notarization in Auto—for removing friction and accelerating adoption.

• Operational cost wins: The company achieved cost efficiencies in borrower acquisition and origination, leading to improved contribution margins in the core personal loan segment. Datta highlighted that these gains offset some pressure from the immature economics of new products.

• Funding strategy evolution: Upstart is increasingly focused on moving new product funding off its balance sheet to third-party partners. While the core personal loan business remains well-funded, management set a goal to transition most emerging product funding externally by year-end, though timing remains uncertain.

• Competitive landscape shifts: As capital markets improve, management observed increased competition in both prime and near-prime lending. Girouard stated Upstart’s commitment to maintaining market share leadership by offering the best rates and process, supported by continuous model enhancements.

Drivers of Future Performance

Upstart’s 2025 outlook is shaped by ongoing AI model improvements, the scaling of new products, and the effort to secure off-balance sheet funding for Home and Auto loans.

• AI-driven efficiency gains: Management expects continued enhancements to its core credit models, which should drive higher conversion rates, better underwriting accuracy, and lower acquisition costs. Model improvements are seen as the main lever for both growth and margin expansion moving forward.

• Funding transition risk: The company aims to shift funding for Home and Auto loans to external partners, primarily banks and credit unions, by the end of the year. However, Datta emphasized that the pace and success of this transition could impact both balance sheet usage and profitability, making it a key area of execution risk.

• Macro and competitive pressures: While the macro environment is assumed to remain steady, management acknowledged that inflation and labor market changes could pose risks. Additionally, increased competition, especially from platforms leveraging deposit funding, may affect pricing and margins in Upstart’s core and emerging products.

Catalysts in Upcoming Quarters

Looking ahead, our analyst team will focus on (1) Upstart’s progress in transitioning Home and Auto loan funding to third-party partners, (2) the ability of Model 22 and future AI enhancements to sustain conversion and margin gains, and (3) the pace at which automation and cross-selling drive adoption in new lending segments. We will also monitor any shifts in the competitive landscape and macro environment that could impact growth and profitability.

Upstart currently trades at $63.60, down from $82.67 just before the earnings. At this price, is it a buy or sell? The answer lies in our full research report (it’s free).

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