Upstart's 2025 Stock Decline Highlights Credit Risk Over Growth Optimism

What happened

Upstart Holdings' stock fell 29% in 2025, contrasting with its reported strong revenue growth and improved GAAP profitability for the year. Investors focused on rising credit risk, especially in the auto loan segment, which exposed vulnerabilities in the AI-driven lending model. DeepValue analysis reveals that despite surface-level improvements, operating cash flow remained deeply negative at -$122.6 million in Q3 2025, indicating a capital-intensive shift from the asset-light marketplace. Loans held at fair value surged to $1.0-$1.2 billion, with contingent loss exposure approaching $800 million, amplifying balance-sheet leverage and dilution threats. This repricing reflects growing market skepticism toward Upstart's ability to sustain growth without escalating credit and funding strains.

Implication

The 29% stock loss in 2025 signals that Upstart's valuation is hypersensitive to credit risk, requiring vigilant tracking of loan performance and investor sentiment. Negative operating cash flow and rising balance-sheet exposure undermine the transition to a capital-light model, increasing the likelihood of equity dilution or slower growth. Prudent investors should consider trimming positions until sustained positive cash flow and reduced loan holdings are evident, aligning with the DeepValue report's 'POTENTIAL SELL' rating. In the near term, any guidance misses or credit downturns could trigger additional sell-offs, with the bear case scenario of $30 per share becoming more probable. Long-term success hinges on Upstart proving its AI models can deliver consistent returns through economic cycles, but current risks outweigh potential rewards for most portfolios.

Thesis delta

The market's reaction in 2025 validates the DeepValue report's emphasis on Upstart's credit and funding fragilities, reinforcing the 'POTENTIAL SELL' rating. This shift underscores that investors are increasingly discounting growth metrics in favor of balance-sheet quality, raising the urgency for monitoring loan vintages and cash flow trends. No fundamental change to the bearish thesis is needed, but the probability of downside scenarios has heightened given the stock's sensitivity to credit headlines.