What happened

Shares of Upstart Holdings (UPST 2.76%) tanked 23.1% in July, according to data from S&P Global Market Intelligence. The artificial intelligence (AI)-powered lending platform reported preliminary unaudited earnings for the second quarter, severely missing its previous revenue and net income guidance. As of this writing, shares of the 2021 high-flyer are down 85% year to date. 

So what

On July 7, Upstart pre-announced its Q2 earnings results covering the three months ended in June. Revenue is expected to be $228 million in the period, missing management's previous guidance for $295 million to $305 million in revenue by a significant margin. This revenue miss negatively affected Upstart's profitability, with a net income loss expected in the range of $31 million to $27 million compared to previous guidance for a net loss of $4 million to $0 million.

What's causing this huge slowdown in revenue? According to management, two things. First, with recessionary fears and rising interest rates, capital markets are tightening up and not lending out as much money. Upstart makes money by taking a fee off of loans processed through its AI engine, so when it processes less capital, its revenue will go down. Second, to assuage investor concerns, Upstart liquidated loans sitting on its balance sheet and converted them to cash. With interest rates rising, this negatively impacted revenue and profitability for the period, but it should just be a one-time hit as management has said it is done keeping loans on its own balance sheet.

Now what

With the stock down so much, Upstart trades at a market cap of just $2 billion. Its market cap was as high as $30 billion less than a year ago. At current prices, the stock trades at a price-to-sales ratio (P/S) of approximately 2 and a trailing price-to-operating income (P/OI) of 12. Clearly, investors generally don't believe in the sustainability of Upstart's revenue growth and historical profitability. With how much the company missed its internal targets this quarter, I don't blame them. 

However, if you are a believer in Upstart's AI-advantaged lending platform, now could be a good time to buy shares. But if you don't understand the business or are wary of fintech businesses, it is best to stay away even with the stock down so much.