Upstart (UPST) Under Pressure Today As Aggressive Fed Leads To Weak Guidance

2:11 pm Tuesday, May 10th, 2022

Upstart (UPST) is down aggressively following the company’s release of its Q1 earnings report last night. The Q1 results exceeded expectations. However, UPST’s downside revenue guidance for Q2 and FY22 is spooking investors.

Upstart provides an AI-based lending platform for banks. It aims to consider factors beyond the FICO score and help borrowers with bad or fair credit get approved. However, its financials and stock performance have been volatile since the stock made its IPO debut in December 2020. Today’s guidance and the stock’s reaction to it are just the latest extension of its volatile trends.

Upstart attributes the weak guidance to a number of factors, but the biggest issue seems to be rising interest rates. Upstart noted that it appears that the Fed will aggressively raise rates this year to combat inflation. A higher rate means less demand generally for loans for approved borrowers, and it lowers approval rates for applicants on the margin. UPST noted that as lending is a cyclical industry, it expects volume and pricing on its platform to vary accordingly.

Furthermore, UPST views jitters about the economy in general, Russia’s invasion of Ukraine, inflation, and COVID lockdowns in China among other influences pressuring its outlook. As a result of increased risk in the economy, banks are demanding higher returns on loans. The average loan pricing on UPST’s platform has increased more than 300 basis points since October.

The company is already starting to publicly test its next product category: small dollar loans, offering a few hundred dollars to help people with immediate cash needs, to be repaid in a few months.

As we have said before, Upstart’s mission is intriguing. It helps banks by expanding the loan decision beyond the FICO score, a metric that Upstart views as outdated, as it came out before cloud computing and modern data science could contribute to borrower profiles. Upstart is particularly helpful to smaller and medium-sized banks, which have outdated technology.

The problem is that, unlike most cloud computing stocks which charge subscriptions and have predictable recurring revenue streams, Upstart gets paid by each loan made, so its fortunes will rise and fall with lending volumes. Thus, rising rates will hurt sales for the balance of 2022 and possibly beyond. From an investment perspective, we would stay on the sidelines for now. Its peer Affirm (AFRM -10%) is also down on the news