Upstart Surpasses Palantir in Rule of 40 Score: Is it a Buy?

Upstart (UPST) beat Palantir (PLTR) in the Rule of 40 score with 102% revenue growth and a 21% adjusted EBITDA margin, resulting in a score of 123. Despite this, Upstart's stock fell after its Q2 earnings report due to a shrinking take rate, a sign of difficulty in converting origination volume into revenue. Upstart's Q2 revenue from fees rose 84% to $241 million, and total revenue was $257.3 million, well ahead of the average analyst estimate. The company raised its full-year forecast and third-quarter projection was ahead of expectations.

Upstart Holdings, Inc. (UPST) has delivered a strong Q2 earnings report, outpacing its competitor Palantir Technologies, Inc. (PLTR) in the Rule of 40 score. The company reported a remarkable 102% year-on-year increase in revenue, reaching $257 million, and achieved a 21% adjusted EBITDA margin, resulting in a Rule of 40 score of 123 [1]. Despite this impressive performance, Upstart's stock fell post-earnings due to a shrinking take rate, a sign of difficulty in converting origination volume into revenue.

Upstart's Q2 revenue from fees rose 84% to $241 million, contributing to a total revenue of $257.3 million, which was well ahead of the average analyst estimate. The company also raised its full-year forecast and its third-quarter projection was ahead of expectations. These results underscore the company's strong market position and successful strategies in expanding its revenue streams.

However, the stock's post-earnings decline can be attributed to a shrinking take rate, which indicates a challenge in converting origination volume into revenue. The company's take rate, which measures the percentage of loans that are ultimately funded, decreased from 12% in 2024 to 9% in 2025. This decrease suggests that while Upstart is successfully originating more loans, it is facing difficulties in converting these originations into funded loans.

Upstart's expansion into new product segments, such as auto and home equity loans, has been a significant driver of its revenue growth. Auto loan originations hit $114 million in Q2, a sixfold increase, while home loans reached $68 million. These segments, though small today, could become major revenue drivers as Upstart leverages its AI platform to reduce default rates and expand margins.

In contrast, Palantir reported a Rule of 40 score of 94, with 48% revenue growth and a 46% EBITDA margin. While Palantir's high-margin model is enviable, its slower growth rate limits its Rule of 40 potential. Upstart, by contrast, balances rapid expansion with improving profitability, making it a more attractive investment.

Upstart's strategic shift to super prime loans and expansion into auto/home equity lending have created scalable revenue streams with improved risk profiles. However, the company faces macroeconomic headwinds, including rising interest rates and regulatory scrutiny. Its stock fell 17% post-earnings despite beating revenue and profit estimates, reflecting market jitters. Nevertheless, this volatility creates an entry point for investors who recognize its AI moat.

In conclusion, Upstart's Q2 earnings report highlights the company's impressive growth and profitability. Despite facing challenges, such as a shrinking take rate, Upstart's strategic advancements and operational efficiencies position it well for continued success. For investors seeking a high-growth fintech play with a path to sustainable profitability, Upstart's combination of AI innovation, margin discipline, and strategic expansion makes it a compelling choice.

References:
[1] https://www.theglobeandmail.com/investing/markets/stocks/UPST-Q/pressreleases/33984198/upstart-holdings-reports-strong-q2-earnings/
[2] https://www.ainvest.com/news/ai-driven-fintech-platforms-upstart-rule-40-outperformance-attractive-investment-palantir-2508/