Shares of artificial intelligence (AI)-powered lender Upstart (UPST 44.72%) rocketed 43.3% Friday, as of 11:25 a.m. ET.

Upstart reported earnings yesterday evening showing improved results, likely due to inflation and interest rate expectations coming down. However, from today's reaction, it appears the positive results and guidance were even better than contemplated by investors heading into earnings.

Fintech personal lending is turning around

In the third quarter, Upstart reported revenue of $162 million, up 20% year over year and 27% sequentially, ahead of expectations for around $152 million, with non-GAAP (adjusted) loss per share of $0.06, $0.01 below the $0.05 loss in the year-ago quarter but also ahead of expectations. Management guided for 11.1% sequential revenue growth to $180 million in the current quarter.

Upstart saw a huge decline when the interest rate environment changed drastically from 2021 to 2022. Since Upstart is not a bank, it has to sell its personal and auto loans to outside investors. When short-term interest rates spiked in 2022 and economic uncertainty increased, those outside investors saw their cost of capital rise and then fled the platform. As a result, Upstart went from growth to declines, and its stock fell from an all-time high of $401 to around $12 at the lows last year. Even after today's big pop, the stock trades around $80, still one-fifth of its all-time high.

However, since the Federal Reserve began cutting the federal funds rate in September, more outside investors appear to be returning to Upstart's platform to buy its high-interest loans.

Upstart's turnaround is real, but its valuation is higher than peers

Upstart now trades around 11 times sales and about 12 times book value, which is far higher than peers such as SoFi Technologies, which trades at 5 times sales and 2.1 times book.

The difference is that SoFi has a banking charter, with its own deposits. While that subjects SoFi to more regulation and can limit growth, it also allows the company to hold loans on its balance sheet, insulating it somewhat in a scenario in which outside investors pull back. Upstart didn't have that luxury when outside investors left.

Still, it appears Upstart's "asset-light" business model is more in favor from certain investors, especially in an increasingly risk-on environment today.