What happened
Shares of fintech Upstart (UPST -1.47%) fell 13% in April according to data provided by S&P Global Market Intelligence. There wasn't any news about the company, but as a bank-related business, it felt the impact of the banking crisis.
So what
After dropping 91% in 2022, and even more from highs in 2021, Upstart stock has more or less stabilized in 2023. It was moving up with rising investor confidence at the start of the year, but as the situation with SVB Financial Group's Silicon Valley Bank unfolded and rippled throughout the banking sector, Upstart stock began to drop again.
Upstart is not a bank; one of its original selling points for investors was that it's meant to be used as a platform for banks to assess a borrower's credit risk, and although it's affected by economic trends, it doesn't have exposure to credit risk like a bank does. However, things have changed. Already last year, it began to hold more loans on its books, which management explained was an experiment of sorts. More recently, it has had trouble selling its loans to the large institutions that typically buy these types of loans and bundle them as debt instruments.
Beyond that, its value as a better tool to evaluate credit risk is not as clear when interest rates are high. In this kind of environment, it doesn't approve as many borrowers, since at higher rates they're more prone to defaults. Even more, with these rates, fewer people are looking to borrow.
The short-term outlook is bleak as these conditions continue to hold.
Now what
Revenue decreased a whopping 52% year over year in the 2022 fourth quarter, and net loss was $55.3 million, down from $58.9 million in net income last year. The first half of 2023 is likely to underwhelm, since Upstart was still posting fairly good performance at this time last year. There's always the chance that investors will see better-than-expected results in a positive light and push the stock up if that's what happens, but there's isn't a likely case for any strong stock gains until there's sustained improvement, and that isn't likely to happen anytime soon.
The back half of the year might bring better tidings for Upstart shareholders, since at that point, the company can begin to demonstrate better year-over-year comparisons as compared to the disastrous 2022 results.
The long-term outlook still looks compelling, since the market opportunity it massive, and Upstart's model does looks like it offers value to partners in a lower interest rate environment. However, that's a while away right now, and still an unknown. Investors considering a new position might want to sit this one out until conditions are more favorable for business to improve.
