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Upstart stock is down almost 35% this year, but investors might be too pessimistic.
The artificial intelligence (AI) boom began in November 2022 with OpenAI's ChatGPT, but many companies, like Upstart, have been monetizing AI for much longer. Upstart has been using AI models since 2014 to assess the creditworthiness of potential borrowers for its lending partners. These AI models are significantly more reliable than traditional human-led methods, such as Fair Isaac's FICO credit scoring system, which considers only five key metrics. Upstart's AI algorithm, however, processes over 2,500 data points in near real-time, delivering rapid and more accurate credit decisions. This superior approach, which is 2.74 times more accurate than traditional models and constantly improves with more data, leads to higher approval rates and more suitable interest rates for borrowers. Consequently, more banks are adopting Upstart's technology. In the second quarter of 2026, Upstart approved a record 558,014 loans worth $4.2 billion, representing a 50% year-over-year growth. While unsecured personal loans made up $3.6 billion of this total, originations in the secured category (car loans and home equity lines of credit) saw a remarkable 218% increase to $589 million. Chairman Dave Girouard foresees AI replacing human-driven loan assessments within the next decade, presenting a colossal $25 trillion opportunity in global originations and $1 trillion in fee revenue for leading companies like Upstart.
Upstart operates on a relatively low-risk business model, as it primarily earns fees from banks and funding partners for utilizing its AI technology to originate loans, rather than lending its own capital (except for R&D purposes). This model has driven impressive financial performance. In the second quarter, the company reported revenues of $364.7 million, marking a robust 42% increase from the previous year. Furthermore, Upstart demonstrated strong profitability, achieving $16.5 million in generally accepted accounting principles (GAAP) net income, which is nearly triple the $5.6 million reported in the same period last year. On an adjusted (non-GAAP) basis, earnings before interest, tax, depreciation, and amortization (EBITDA) rose by 45% to $76.9 million. This non-GAAP measure is preferred by the company as it excludes one-off and non-cash expenses like stock-based compensation. These figures highlight Upstart's ability to achieve both rapid growth and sustained profitability, a challenging feat in the current market landscape.
Beyond its consistent operational strength, Upstart's current valuation makes a compelling case for significant stock appreciation. The stock is currently trading at a price-to-sales (P/S) ratio of just 2.6. This is substantially lower than its three-year average P/S ratio of 5.5, suggesting the market might be underpricing the company's potential. Furthermore, management projects total annual revenue of $1.4 billion for 2026, which implies a forward P/S ratio of merely 2.1. To simply reach its three-year average P/S ratio of 5.5, Upstart's stock would need to climb by an impressive 162% by the end of this year. This valuation discrepancy likely stems from market pessimism regarding potential interest rate hikes, which could slow economic activity and reduce demand for credit. However, Upstart has already demonstrated its resilience and ability to navigate high-interest-rate environments during 2022 and 2023, emerging stronger. If interest rates stabilize or do not rise, investor sentiment is expected to improve, paving an easier path for the stock to double. The author, who personally holds the stock, expresses confidence in this prediction and plans to retain his investment beyond 2026.