Upstart (NASDAQ:UPST) CEO Paul Gu said the company is entering a “second leg” of its development, focused on converting its artificial-intelligence lending platform into sustained profitable growth while expanding into secured credit products.
Speaking at Bank of America’s SMID Cap Executive Insights event, Gu described Upstart as “AI for consumer lending,” operating a marketplace where consumers can seek personal loans, auto loans and home-equity lines of credit, or HELOCs. He said the company ultimately intends to offer a broader suite of consumer credit products.
Focus shifts to profitability and capital efficiency
Gu, who recently became CEO after co-founding the company 14 years ago, said Upstart spent much of its first decade building its technology, repayment-data set and relationships with capital providers, rating agencies, banks and regulators. He said those efforts were necessary to demonstrate that its lending models could perform over the multiyear life of loans.
In 2026, management has narrowed its priorities around contribution profit, which Gu called the company’s best measure of operating progress. He said the second quarter provided evidence of the strategy, with contribution profit reaching a record level that exceeded the company’s fourth-quarter 2021 result despite what he described as less favorable macroeconomic conditions.
Gu said personal-loan originations increased 23% sequentially in the second quarter, representing approximately $760 million in growth. He added that Upstart’s balance-sheet loans declined to nearly a two-year low as a percentage of total loans outstanding, while third-party capital funded most of the growth.
“We did 23% sequential growth,” Gu said. “We did that while predominantly funding that with third-party funding.”
He said the company’s core personal-loan operation remains a key strategic focus because of its margins and competitive differentiation. While Upstart has also invested in broader products and markets, Gu said management’s focus on the core personal-loan business helped drive growth and contribution profit in the second quarter.
Gu reiterated the company’s longer-term expectation for a 35% compounded growth rate over the next several years, while noting that macroeconomic conditions can influence results. He said Upstart’s top priority remains “do credit right,” meaning growth must be balanced against credit performance.
Home and auto products target contribution profitability
Upstart’s newer home and auto lending products expanded their contribution margins by 61 percentage points in the second quarter, according to Gu. He said the businesses are not yet contribution profitable, but management expects them to reach that point by the end of the year.
The improvement followed a shift in emphasis from proving borrower and investor demand to demonstrating unit economics. Gu said the company is targeting lower operating costs and more sophisticated pricing, or take-rate, optimization in the secured-lending products.
For HELOCs, he said verification costs and complexity are higher than for personal loans because of processes involving property liens and related documentation. Upstart sees opportunities to increase automation in those workflows.
In auto lending, Gu said the company is seeking to tailor economics more closely to the value it provides in individual dealership transactions. In some cases, he said, Upstart may be the only available financing source because of its ability to assess a borrower’s risk; in others, it competes in a more price-sensitive market.
Gu said home and auto could continue improving beyond break-even as Upstart adds value for borrowers, though he characterized that as a longer-term process.
Macro conditions offset operating execution
Bank of America analyst Mihir Bhatia asked why Upstart maintained its full-year guidance despite an increase in UMI, a company metric tied to the macroeconomic environment and expected credit defaults. Gu said each five-point change in UMI can affect originations by roughly 5% to 10%, with revenue and contribution profit generally moving proportionately.
Gu said stronger execution in areas within Upstart’s control—including lending models, user experience, automation and customer reach—was offset by the macro headwind. He said the company likely would have raised guidance if UMI had remained in a lower portion of its previously anticipated range.
On a question about a 2024 loan vintage that appeared to be underperforming targets, Gu said overall credit performance has been strong and that variation between loan vintages is normal. He said changes in UMI can create tailwinds or headwinds for loans originated at different times, since the metric is correlated with default rates.
Investors weigh operating expenses, bank plans and cash use
Gu acknowledged investor questions about operating expenses, capital needs and Upstart’s planned bank. He said operating costs have increased partly because of investments in new areas, but added that “the lion’s share” of that expense growth has occurred and that the growth rate in costs should slow considerably during the rest of the year.
Upstart has said it believes it has sufficient capitalization to open Upstart Bank early next year, according to Gu. He said the bank should be operationally and economically accretive by enabling the company to reach more states and extend more offers.
Gu also said the company views capital held on its balance sheet and in co-investment arrangements as a necessary part of its funding infrastructure rather than the primary driver of value. He said Upstart’s value should instead be measured by the growth of contribution profit, primarily fee revenue, and by the efficiency with which it uses equity capital.
Discussing capital allocation, Gu said Upstart had considered repurchasing convertible debt but concluded its stock offered a higher expected internal rate of return. He said the company will continue to weigh internal investment, stock repurchases and other uses of capital based on expected returns, while preserving sufficient cash for initiatives including the bank launch.
Gu also highlighted Cash Line, a newer product aimed at financially stressed consumers. He said the offering has shown strong customer demand but remains early in development, with further work needed on funding, credit calibration and unit economics.
About Upstart (NASDAQ:UPST)
Upstart Holdings, Inc operates a cloud-based lending marketplace that leverages artificial intelligence and machine learning to assess borrower creditworthiness. The company partners with banks and credit unions, providing its proprietary AI models and underwriting platform to facilitate consumer credit products. By focusing on non‐traditional data points—such as education, employment history and other real‐time indicators—Upstart seeks to improve approval rates and lower loss rates compared with conventional credit scoring methods.
Upstart’s core offering centers on unsecured personal loans, which borrowers can use for purposes such as debt consolidation, home improvements or major purchases.
