Why Is Upstart Stock Down Despite Growth? 5 Things to Know

Despite beating first-quarter expectations and showing strong growth, Upstart stock is down 75% YTD. In fact, Upstart Holdings (Nasdaq: UPST) posted its fourth straight quarter with over 100% YOY revenue growth.

Although this may be true, Upstart stock lost over half its value following the earnings report. Investors quickly sold shares after learning about the company’s plans to hold excess loans on its balance sheet.

The Federal Reserve’s aggressive rate hikes to cool surging inflation is causing less interest in borrowing. As a result, Upstart said it would hold the unsold loans on its balance sheet, countering its previous business model.

The investor reaction is causing management to backtrack. According to a report from the WSJ, the company’s CFO has other plans to deal with the extra loans.

After a steep selloff yesterday, the stock market officially entered a bear market. Are investors overreacting with UPST stock down over 90% from its ATHs? Or is it time to give up on Upstart Holdings? Here are five things to know about Upstart stock and what you can expect going forward.

No. 5 Q1 Earnings Beat

Upstart’s first-quarter earnings mark its seventh profitable quarter in a row. Loan transaction volume surged 174% YOY to 465K with over 350K new borrowers.

The company easily beat both top and bottom-line expectations.

• EPS: 0.61 vs 0.53 exp.
• Revenue: $310 million vs. $300 million exp.

Not only did Upstart stock generate more revenue, but they are converting it into earnings. Net income skyrocketed 224% YOY, reaching $32.7 million.

So far, Upstart’s algorithms are helping get loans into borrowers’ hands which may not be able to get approved otherwise. For instance, the company notes 74% of users get instant approval without document uploads or calls.

Though the quarter shows solid growth in most areas, there are a few red flags. For one thing, higher interest rates are starting to deter borrowing.

The pandemic caused massive consumer spending between interest rates dropping and government assistance. As a result, Upstart saw strong demand for its services. Moreover, consumers were less likely to default, driving credit performance up.

Upstart generates earnings primarily in one of two ways. First, they earn a fee for loan referrals from banks. And secondly, banks pay a fee when they find a loan through the Upstart Platform.

With this in mind, default rates are creeping back up while consumer loans remain at an all-time high. For this reason, investors are skeptical about the company’s future.

No. 4 Slowing Demand for Loans

Although the company continues delivering strong growth, management is lowering its guidance. On the recent earnings call, CEO David Girouard mentions a few critical factors.

1. Higher underlying base rates
2. Investors demanding risk premium

The Fed manages interest rates to influence the economy. During the pandemic, the discount rate was set to a historical low of 0.25% to encourage economic growth. As a result, consumer spending shot up.

Consequently, demand is getting overheated while supply is lacking in many areas. For example, many gas and oil companies went out of business during the pandemic while energy demand fell. Now that people are returning to their everyday lives (work, travel, etc.), demand is back to pre-pandemic levels.

The demand imbalance is causing inflation to soar. As demand rises, prices also rise unless supply can meet it. Accordingly, the Consumer Price Index (CPI), a popular measure of inflation, is up 8.6% from last year.

No. 3 Inflation and Upstart Stock

Inflation may have more to do with Upstart stock than you think. For one thing, the Fed is trying to discourage buying (demand) to cool inflation by raising interest rates. Yet, for Upstart, this directly affects its business. Upstart makes money from consumers buying loans.

With higher interest rates on loans, people are less willing to borrow. As a result, a few weeks ago, Upstart hinted it would be putting the excess loans on its balance sheet.

Many investors took to Upstart stock because of its lower risk balance sheet. The idea of swelling the balance sheet for anything other than R&D was not in the plans. So, Upstart stock fell over 61% after earnings as investors fled for safer assets.

On top of this, as David mentions on the earnings call, investors are demanding risk premiums. In other words, in this environment, investors are less willing to pay for risky assets.

For example, unprofitable growth stocks are some of the worst-hit during this market selloff. The investor mindset is shifting from growth to value as cash flow, and returns are the primary concern.

Therefore, management is backtracking on its comments. Instead of holding loans on its balance sheet, it will scale back lending volume.

Keep reading to learn what this means for Upstart stock as we advance.