What happened
Shares of Upstart (UPST 0.07%) stock lost 32% of their value in December, according to data provided by S&P Global Market Intelligence. The one-time market darling continues to drastically fall as sales growth slows, profits turn to losses, and the general market atmosphere is hostile to risky tech stocks.
So what
Upstart stock was explosive in 2021 as it posted astronomical growth, including one quarter of four-digit revenue growth. Investors were taken by its disruptive model that uses artificial intelligence to determine credit quality. According to Upstart, that has resulted in fewer defaults at the same approval rates, which is a plus for lenders, and more approvals at the same risk rates, a plus for borrowers.
However, its thesis seems to have crashed as the economy falters and interest rates rise. In this kind of environment, borrowers are more reluctant to approve loans as the risk of defaults increases. Upstart's own platform decreases as a benefit since with higher rates the real risk increases, making it harder for the platform to spot loans for approval. As borrowers use it less, the fees Upstart gets are declining as well.
NASDAQ: UPST
Key Data Points
Revenue decreased 31% year over year in the 2022 third quarter, leading to a net loss of $56.2 million, down from net income of $29.1 million last year. Management is expecting a 55% decrease in revenue in the fourth quarter and an $87 million loss in the fourth quarter.
Now what
It's not just the declining performance that's setting investors on edge. It's really the collapse of the underlying basis of the business, and whether or not Upstart actually has anything to offer that's better than conventional methods of credit assessment.
Upstart still insists that its model is better, and even in this atmosphere, it claims that using its platform results in 53% fewer defaults at the same approval rates.
When interest rates are low, it appears to be of real use in approving more loans, benefiting both lenders and borrowers. However, its utility in this kind of economy is more dubious, and it may end up being a cyclical stock.
The economy does well an overwhelming amount of time, even though it may be hard to remember that right now. Upstart's performance should improve as the economy does, and as it gathers more data over time, its platform should be even more accurate and provide greater value to clients.
But that could be far off into the future. In the meantime, if you don't already own shares, you may want to sit on the sidelines until the business shows signs of improvement.
