Upstart is warning that the worst may still be on the way, even as rising interest rates and falling loan volumes have already caused the once high-flying fintech lender's stock to sink nearly 90% this year and prompted a round of layoffs last week.
The company reported earnings on Tuesday that missed the mark Wall Street analysts had set. Its share price fell more than 20% in after-market trading, recovering only slightly Wednesday. CEO Dave Girouard cautioned analysts that there may be more pain to come.
"We’ve chosen to take a conservative position with respect to the direction of the economy in the coming quarters," Girouard said on the company's earnings call. "In other words, we assume the worst is in front of us. We’ll be pleasantly surprised if this turns out not to be the case."
The San Mateo company reported a 31% annual decrease in revenue for the third quarter and a net loss of $56.2 million, compared to a roughly $29 million profit in the third quarter of 2021.
The company is projecting further drag on its revenue. It expects between $125 million and $145 million in fourth quarter revenue, which at the low end would mark a 58% decrease from the final three months of 2021.
Upstart says it is not a bank, but rather a technology provider for lending that uses artificial intelligence to write productive loans to borrowers overlooked by traditional creditors. It makes most of its money by charging fees for matching financial institutions with borrowers.
Higher interest rates and economic uncertainty have wreaked havoc on that business, often referred to as marketplace lending. Upstart is approving 40% fewer applicants compared to a year ago and at rates 800 basis points higher, according to Girouard.
"Many of our lending partners have reduced their originations, raised their rates, or both," Girouard said. "This is generally out of an abundance of caution with respect to the economy and despite the fact that their Upstart-powered loan portfolios have met or exceeded expectations since the program began in 2018."
Consumers are also in growing trouble. CFO Sanjay Datta said on the call that defaults are rising, personal savings rates are declining, and credit card debt is at record levels.
Funding problems
Upstart last quarter warned that the funding for its loans was under pressure as investors shifted away from backing riskier types of consumer debt. It said it would hold more loans on its balance sheet as it sought stable funding.
The company reported holding about $700 million in loans, notes, and residuals at the end of the third quarter, compared to $140 million at the same point last year.
Company officials reiterated to analysts that Upstart does not plan to become a chartered bank, a move that has allowed competitors SoFi and LendingClub to take in deposits and use the low-cost funding source to write loans directly.
"We believe fundamentally in a marketplace structure in the sense that a lot of lenders making independent decisions over the long haul is going to get to the right answer," Girouard said.
Feature, or bug?
That model did in fact allow Upstart to scale up quickly during the low-interest rate environment of 2021. The company originated nearly $12 billion in loans and its share price soared from $20 at its December 2020 IPO to $400 in October 2021. But analysts expected rising interest rates would challenge Upstart along with a list of other fintechs that thrived one year ago, and that is clearly playing out.
Last week, Upstart laid off 140 hourly employees, blaming “the challenging economy and reduction in the volume of loans on our platform." Girouard said Tuesday that the company is reducing its marketing spending and limiting new hires.
While saying he was unhappy with the overall results, Girouard said the company added 17 lending partners to its platform last quarter, matching the total for all of 2021. The company has about $830 million in cash on its balance sheet and is reducing advertising costs and slowing hiring in response to the worsening conditions.
Girouard cast the reduction in loan volume as "a feature of our platform, not a bug," as he said Upstart’s modeling is adjusting to the current conditions.
"Our results in Q3 were certainly not what we wanted them to be," Girouard said. "But I also believe they reflect the Upstart team making the right decisions in a very challenging economic environment for the long-term success of the company."
Wall Street does not appear to be buying that view just yet. Upstart’s shares were trading down about 15% midday Wednesday. Wedbush lowered its target price for Upstart's share from $15 to $10 and noted in a report following earnings that the company, founded in 2012, has never been recession-tested.
"We fear that weakening delinquency and loss trends combined with macro- and geopolitical risks is leading to waning appetite from Upstart's credit buyers and the securitization market," wrote analysts David Chiaverini and Brian Violino. "The biggest risk to Upstart, in our view, is its reliance on third-party funding, and this risk tends to become exacerbated during recessions.
