Shares of fintech company Upstart (NASDAQ: UPST) fell by more than 10% yesterday after it announced Q3 results. Upstart reported revenue of $157 million and an adjusted loss of $0.24 per share. Analysts forecast Upstart to report revenue of $169.4 million and adjusted earnings of $0.08 per share. In the year-ago quarter, its revenue stood at $228 million while adjusted earnings of $0.72 per share.
Further, the company forecasted Q4 sales between $125 million and $145 million compared to consensus estimates of $185.3 million. We can see that Upstart not only missed earnings and revenue guidance for Q3, but it also provided a tepid forecast for the quarter ending in December, dragging its stock lower in the process.
What is Upstart, and what does it do?
Upstart operates in the financial lending space and provides tools and solutions to lower the credit risk of its banking partners. The Upstart artificial intelligence lending platform aims to improve access to affordable credit and reduce the risks or costs of lending for enterprise partners. Upstart claims its platform uses machine learning models to accurately identify risk, increasing approval rates compared to legacy credit score-based lending models.
Upstart is wrestling with a challenging macro environment and higher interest rates, which have decelerated its top-line growth by a significant margin in 2022. The company increased revenue from $95 million in 2018 to $846.6 million in 2021. Analysts now expect sales to fall to $840 million in 2022.
However, Upstart remains bullish, and its CEO, Dave Girouard, stated, “We're eyes wide open to the challenges of the current macroeconomy, and determined to make the decisions that will optimize for the long-term success of Upstart. With a healthy balance sheet, robust unit economics, and strong pricing power, we believe that we're well positioned to navigate an extended period of economic uncertainty while continuing to invest strategically in future growth.”
Let’s see what impacted Upstart in Q3 and if it can stage a comeback in the next year.
Is UPST stock a buy or a sell right now?
Unlike a traditional bank, Upstart originates loans via its robust tech platform to near-prime borrowers. It is quite optimistic about assessing credit quality better compared to tried and tested methods such as the FICO credit score. So, it also allows borrowers that are lower on the credit spectrum to access loans and other lending products at competitive rates.
But Upstart requires institutional investors to fund its loans to meet rising demand from borrowers. An extremely challenging macro environment is, however, pushing investors away, thereby impacting top-line growth for the company.
Upstart also partners with banks that use its platform, but a majority of its loans are sold to institutional investors. Right now, Upstart is not only constrained by issues related to funding, but it has also seen a decline in consumer demand for loans.
One metric used by the company is the conversion on rate requests. It is the number of loan transactions completed on loan requests received on the Upstart platform, which has declined to 10% in Q3 from 13% in Q2.
The Upstart platform is dynamic and accounts for the possibility of an increase in loan defaults due to rising interest rates. So, its annual percentage rates on loans are also bound to increase. Upstart emphasized approval rates for loan applicants fell by 40% in Q3 as default rates were up 70%.
What next for UPST stock price and investors?
Valued at a market cap of $1.4 billion, UPST stock is priced at less than two times forward sales. Shares of the company went public back at $20 in December 2020 and touched an all-time high of $390 last October. It’s now trading at $17.
Investors should expect UPST stock to remain volatile until the economy recovers significantly, allowing the company to expand its loan book at an accelerated pace.