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Upstart (UPST +34%) is "up to start" the day after beating on earnings and revenue. Probably even more importantly, the company issued upside revenue guidance for Q1, which is typically a seasonally slower period. In further welcome news, UPST, which provides an artificial intelligence (AI)-based lending platform for banks, also announced a $400 mln buyback authorization.

This stock has been on a roller coaster ride. Since making its IPO debut in December 2020, when it priced at $20, it ran to $400 by October 2021 before falling back to $109 by yesterday. Concerns that rising interest rates could temper consumer demand for loans, anxiety over rising consumer default metrics, jitters about UPST entering a brand new market from scratch (auto loans), and a sell off in tech names have taken a toll on the stock in recent months.

• For Q4, Upstart reported adjusted EPS and revenue well ahead of consensus estimates. Revenue jumped 252% yr/yr to $305 mln. UPST also guided above expectations for Q1 and FY22.
• In other positive operating metrics, bank partners originated 495,205 loans, totaling $4.1 bln, across its platform in Q4, up 301% yr/yr. That's important given UPST's revenue structure. Rather than making money on subscriptions, UPST derives 96% of its revenue from loan fees. That can lead to volatility if loan demand declines, and rising rates tend to stifle consumer demand for loans.
• UPST mainly focuses on personal loans, but a key development has been its expansion into the potentially lucrative $1 trillion auto loan market. UPST concedes that scaling the auto business is no simple task, as distribution channels and auto refi channels are not nearly as well established as they are in personal lending. The good news is that Upstart has a unique and proprietary auto refinance product with far less competition than it faced in personal lending. Auto loan originations are now ramping quickly. This will be an area to watch in 2022.

The idea behind Upstart is intriguing. Namely, it helps banks by expanding the loan decision beyond just FICO scores, which Upstart views as outdated, as it came out before cloud computing and modern data science. A lot more data points are available today to guide algorithms to accurately predict whether a loan is likely to be repaid. Upstart is particularly helpful to smaller and medium-sized banks, which often have outdated technology.

Bottom line, this was an encouraging quarter for Upstart, and investors are happy to recoup some of the big losses the stock has suffered since October. We do see one big chink in the armor of the Upstart story. Unlike most cloud computing stocks, which charge subscriptions and thus develop nice, predictable recurring revenue streams, Upstart gets paid by each loan made. Its fortunes will rise and fall with lending volumes, so expect some volatility, as rising interest rates will be a headwind. However, the stock has pulled back quite a bit, so maybe a lot of the expected rate increases are priced in.