What happened
The stock market was having a pretty dismal day on Wednesday. The Dow Jones Industrial Average was on pace for its worst one-day loss since 2020, and the S&P 500 was down by 4% as of 3 p.m. ET.
In contrast to the overall market, lending technology company Upstart Holdings (UPST 3.80%) was a major outperformer, with shares rising by about 6%.
So what
Upstart recently plunged by more than 50% after its first-quarter earnings, and the biggest reason was that the dollar amount of loans carried on Upstart's balance sheet more than doubled. The company defended this as a standard part of its business model as it rolls out new types of loans, but investors took it as a major risk factor.
Image source: Getty Images.
Recently, Upstart's management has made it clear that it understands investors' concerns and is going to immediately take steps to address them. In a presentation, CFO Sanjay Datta said the company now plans to limit its balance sheet exposure to research and development loans only, even if it means it needs to limit lending volume during turbulent credit markets.
In the first quarter, a lot of loans on Upstart's balance sheet were there because Upstart couldn't find bank partners to buy them. Now, Upstart will continue to hold a moderate amount of loans as proof of concept when rolling out new products (like its auto loans), but that's it.
Separately, Upstart announced that Sharonview Federal Credit Union has become the latest financial institution to partner with Upstart on personal loans.
Now what
Upstart's commitment to limit its credit risk exposure on the balance sheet has certainly resonated with investors, as shares have nearly doubled from the post-earnings low over the past few days. However, it's worth emphasizing that Upstart is still about 88% below its all-time high, so while investors seem relieved to hear this, there's still a long way to go.
