What happened
Shares of fintech Upstart (UPST -1.97%) were rocketing higher today, up 34.3% as of 3:47 p.m. ET.
Upstart's stock had been down severely over the past year and is still more than 95% below its all-time highs set back in 2021. Coming into the report, the company's short interest as a percentage of shares outstanding was also still quite high at 27.4%. So, there was a fair amount of skepticism heading into this report.
However, Upstart's first-quarter earnings were surprisingly encouraging on several important fronts, meaning this surge may be the beginning of a recovery and not just a short-term short squeeze.
So what
In Q1 2023, Upstart recorded revenue of $102.9 million, down 67% from the year-ago quarter, with an adjusted (non-GAAP) loss per share of $0.47. While that huge decline in revenue and those ongoing losses may seem like poor results, each metric was above the analyst consensus coming into the report.
However, the stock's rise today was likely less about Q1 results and more about guidance, as well as an important announcement on funding. A big problem for Upstart over the past 18 months was that it isn't a bank with its own deposit franchise. That has made the AI-powered loan-underwriting platform dependent on third-party loan buyers, such as small banks.
As short-term interest rates have risen at an aggressive pace over the past year and recession fears loomed, it was perhaps not surprising that those loan buyers pulled back, leaving Upstart constrained as to how many loans it could originate. That has been the main driver of its enormous revenue declines over the past year.
However, on the conference call with analysts, CEO David Girouard disclosed that Upstart had secured $2 billion worth of third-party buying commitments over the next 12 months. That's a big win for Upstart and perhaps a sign that investor appetite for Upstart's higher-rate and relatively short-duration personal loans is coming back. Moreover, management said it was also seeing metrics internally and from third parties that the U.S. consumer was getting healthier, with savings rates ticking up after bottoming out in Q3 2022.
On that note, management guided for $135 million in revenue in the current quarter, which would mark a 31% quarter-over-quarter increase over the just-reported first quarter. That perhaps signaled that last quarter was a bottom for Upstart's revenue and profitability.
Now what
It should be known that Upstart's originations were just under $1 billion last quarter, so that incremental $2 billion in funding could increase this year's annual originations by around 50%, which is a big deal. However, back in 2021, when interest rates were zero and consumers were full of stimulus payments, Upstart originated $11.8 billion worth of loans. So even with the new funding, that would only bring Upstart's capacity to around half of what it was in 2021.
Still, the announcement was significant, as it may be indicative of a change in the market. This morning's inflation report also showed inflation continuing to come down, albeit slowly. And many think the Federal Reserve has now made its last interest-rate hike of this cycle.
If banks and loan buyers have a sense that short-term interest rates have topped out, that may make them more confident of their funding costs, which could entice them back into buying more loans from Upstart. And while Upstart's revenues look ready to turn upwards, management has also taken this year's downturn as an opportunity to streamline costs and cut staff.
So while the company is by no means out of the woods, the green shoots outlined in this report were certainly encouraging. If last quarter did in fact mark the bottom and the beginning of a new upcycle, Upstart's $1.6 billion market cap could make it an intriguing turnaround play. Of course, much will depend on inflation and the macroeconomic picture.
