Upstart Holdings (NASDAQ: UPST) stock is down 23% after and pre market on the basis of the announced results. Those results weren’t good, this is true, but what has had the greater effect is the forecast for the near future. As ever the value of a stock - of any investment - is the net present of the discounted future income from it. It isn’t, therefore, past results that determine - or at least if they do only as an indication of what future might be. Forecasts of future results and income though, they do affect an investment or stock price substantially.
Those results: “Upstart Holdings (NASDAQ:UPST) stock dropped 15% in Tuesday after-hours trading after its Q3 revenue and earnings and its Q4 revenue guidance missed Wall Street consensus estimates. The lending platform's growth has been constrained as high mortgage rates dampen for mortgage loans. The company that provides an AI-driven lending platform for banks and credit unions expects Q4 revenue of ~$135M, vs. the $157.6M consensus. That guidance is comprised of $150M of revenue from fees and net interest loss of $15M.”
Interest losses seem a tad odd but they’re explained by Upstart taking some portion of some loans that go out. So, in a rising rate environment that causes losses.
Upstart Holdings stock price from Google Finance
As we can see the UPST stock price was bid up on the run in to the results announcement. The market was definitely hoping for better than this and a goodly part of the stock price fall is in the departure of that hope value.
We’ve looked before at Upstart Holdings: “So, Q1 results beat expectations, Q2 might bring adjusted EBITDA to flat, what's not to like? Well, there is the one more little feature here. Upstart used to be just the platform. Providing the tech and taking a fee for it. Which is one business model. Another is that Upstart actually make the loans. Keep the lending decisions on its own books - hey, why let the banks make all the interest, right? And Upstart has been increasing its exposure here: “Will the company continue to utilize its balance sheet to retain more loans? Notably, Upstart's loans held on its balance sheet surged to $883M at the end of 2022, up from $143M at the end of 2021. It represented nearly 46% of its asset base,” Hmm, well, views will differ here. But are we really sure that the top of the credit cycle is really the place to be taking more credit risk onto the balance sheet? Of course, if the AI really works in selecting only the best credits then this won't be a problem. But does it?
The problem being that apparently AI doesn’t solve that problem. It’s also true that we’re not going to really test this model until we have a proper recession and we see what happens to credit quality. Which is something to look forward to, right?