Upstart Holdings (UPST +0.84%) claims to be making steady progress in developing tools to assess creditworthiness, but its potential clients continue to be slow to sign on. Shares of Upstart lost 25% of their value at the open Wednesday after the company delivered third-quarter results after the bell Tuesday that missed Wall Street's expectations, and guided for lower-than-expected revenues in the fourth quarter.
Revenue growth slows as interest rates climb
Upstart uses an artificial intelligence platform to provide banks with credit profiles for would-be borrowers -- a tool that, if successful, could upend the traditional credit-scoring process. But the tool needs time to prove its effectiveness, and Upstart is having a harder time selling its system to lenders in this environment.
Higher interest rates tend to put added financial pressure on borrowers and make lending more dangerous -- and that's the macroeconomic situation that we're in now. In such a climate, lenders are more likely to stick with tried and true credit assessment methods, and less likely to take a chance on something new.
Upstart lost $0.24 per share in the quarter on revenue of $135 million, missing Wall Street expectations for a $0.02 loss on sales of $140 million. Revenue was down 14% year over year, and the number of loans originated by Upstart's partners fell by 34%.
The company said it expects to break even on an adjusted basis in the fourth quarter, with revenue of about $135 million. The consensus among Wall Street analysts had been that its top line would hit $157 million.
"We're making rapid progress in building the world's first and best AI lending platform," CEO Dave Girouard said. "Of course we'd prefer to be growing quickly, but this is a time when it's wise to be operating in a conservative mode."
NASDAQ: UPST
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Is Upstart a buy after its dramatic plunge?
During Upstart's short tenure as a public company, its stock has been volatile. Even with Wednesday's drop, the shares are up nearly 70% for the year, but the stock is also nearly 95% below the all-time high it set in 2021, and down dramatically from where it traded late summer.
Upstart is the textbook "wait and see" company. It has developed a platform that it believes will provide superior results for its clients, but only time will tell if the platform actually works as intended, and whether lenders believe it provides better value than the tools they have used in the past.
The data, to date, suggests Upstart's algorithms are doing a decent job at assessing borrowers' credit quality. But so far, that hasn't translated into revenue for Upstart in the way the company had hoped. Upstart could still end up being a big winner from here, but investors also have to be aware it could end up a zero.
Those who believe in the company's potential and are tempted to buy in after this drop would be wise to limit their Upstart stake to a small piece of a diversified portfolio, and to prepare for continued volatility from here.
