What happened
Shares of the artificial intelligence lender Upstart Holdings (UPST -0.58%) continued their plunge downward after a disappointing earnings report sent shares plummeting more than 56% yesterday.
Today, shares had fallen more than 12% as of 11:46 a.m. ET as more analysts downgraded the stock.
So what
On Tuesday after the market closed, Upstart reported diluted adjusted earnings per share of $0.61 on total revenue of $310 million, both numbers that beat analyst estimates. However, Upstart also lowered its full-year guidance including its revenue forecast, from $1.4 billion to $1.25 billion.
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The main reason for this is due to an expected slowdown of transaction volume as investors of Upstart loans demand higher returns for taking on the risk, which leads to higher pricing for consumers on Upstart's platform, and which then translates into fewer originations.
Investors were also very concerned due to the fact that Upstart held a small portion of loans on its balance sheet in the quarter that it normally would sell to investors. Funding for Upstart loans from the capital markets looks to have dried up a bit in the first quarter of the year.
The stock has now been downgraded by several analysts, but this morning Atlantic Equities analyst Simon Clinch downgraded the stock from an overweight grade to neutral and cut its price target from $245 to $45.
"While disappointing, we are more concerned by the company's increased use of its balance sheet to supplement loan origination -- something we believe was unnecessary," Clinch wrote in a note to investors. Clinch does still see long-term potential for Upstart but believes the environment will need to improve first.
Now what
It has been quite a fall for Upstart, with shares now trading below $30 after rising to nearly $400 last October.
While the entry point is much more attractive and Upstart still could have long-term potential, I can't recommend this stock until the company is able to solve issues in the capital markets and further prove the effectiveness of its credit underwriting models.
