Upstart Tweaks AI Underwriting as Rising Risk Dents Conversions

What happened

Upstart Holdings, which relies on its proprietary AI model for consumer lending, is adjusting its underwriting approach in response to increasing credit risk that has trimmed loan conversion rates. The company is deploying new calibration tools aimed at achieving steadier approval processes and supporting broader loan expansion, as highlighted in recent news. This development aligns with the DeepValue report's concerns about the sensitivity of Upstart's business to credit performance and external funding conditions. While the report notes a return to profitability in Q2 2025, it also points to underperformance in legacy vintages and a valuation that may already reflect a strong recovery. Upstart's proactive moves underscore the ongoing challenge of maintaining growth and credit quality amid economic volatility.

Implication

The underwriting tweaks indicate that Upstart's AI model may be faltering under rising risk, potentially eroding its claimed competitive advantage in granular risk selection. If conversions do not recover, it could lead to lower origination volumes, squeezing revenue growth and testing investor patience. Funding resilience remains a key swing factor, as institutional buyers account for over half of loans and demand stable credit performance to maintain capital flows. With valuation already embedding a meaningful rebound, any failure to demonstrate durable model improvements could trigger downside pressure on the stock. Long-term, Upstart must prove its AI can consistently outperform across credit cycles while expanding into auto and HELOC products to diversify risks and justify current multiples.

Thesis delta

The news reinforces the existing HOLD thesis by highlighting ongoing vulnerabilities in Upstart's AI underwriting model and credit performance. It underscores that the company's reactive adjustments do not resolve core dependencies on external funding and macro conditions, maintaining the balanced risk-reward profile. No material shift is warranted until sustained evidence emerges of improved credit stability and funding durability.