Few companies have suffered as much from the Federal Reserve's interest rate campaign as Upstart (UPST 2.76%). Shares of the AI-based consumer lending company have fallen as much as 97% from peak to trough and are still down more than 90% from their peak in 2021. During the heady days of the pandemic, Upstart was growing at a blistering pace with revenue more than tripling, and it reported mid-teens profit margins even on a generally accepted accounting principles (GAAP) basis.
However, the Fed's rapid interest rate hikes to bring inflation under control have quashed demand for Upstart's loans, and the regional banking crisis also made its lending partners more cautious about taking on its loans.
Investors have had to be patient as Upstart's business has been down while rates remain high, and they got some more bad news in the company's fourth-quarter earnings report after Upstart beat estimates but offered disappointing first-quarter guidance. The stock was down by double-digit percentages in after-hours trading on Tuesday.
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Upstart's wheels are still spinning
Overall, the results showed the business is in a steady but weak state due to the macroeconomic challenges above. Revenue in the quarter was $140.3 million, which was down 4% on a year-over-year basis, but up 4% on a sequential basis. That beat the consensus of $134.9 million.
Upstart originated 129,664 loans for a total of $1.3 billion, down 19% from the quarter a year ago, which reflects weak demand. On the bottom line, it eked out an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profit of $0.6 million, but reported a GAAP loss of $42.4 million. On an adjusted basis, it lost $9.7 million, or $0.11 a share, which was slightly better than estimates at a per-share loss of $0.14.
Upstart's guidance was the real problem for investors. Management said it saw revenue slowing to $125 million in the first quarter of 2024 and an adjusted EBITDA loss of $33 million. That forecast indicates that Upstart isn't expecting to get any help from the Fed or macro conditions to start the year.
Something needs to change at Upstart
Ostensibly, Upstart's technology is still effective. Every quarter, it trots out data showing how much better its AI model performs against Fair Isaac's FICO score in assessing default risk.
However, what seems to be a competitive advantage hasn't been enough to drive new business to the platform or attract lending partners.
Given those challenges, it may be time for Upstart to try something new. There's no guarantee that interest rates will fall this year, despite the Fed's earlier forecast calling for three rate cuts, and considering the low unemployment and overall strength of the economy, Upstart may need to find a way to drive growth in a high interest rate environment.
The good news for investors is that a new product may be on the way. On the earnings call, CEO Dave Girouard said, "We've also identified a somewhat different opportunity to assist our lending partners in periods of reduced liquidity when banks tend to prioritize retaining existing customers over acquiring new ones."
Girouard also promised that the company is "increasing our innovation on the money supply," in order to find new lending partners and streamline those relationships. It also announced a deal with Ares, a leading global alternative investment manager, which will acquire $300 million of personal loans from Upstart.
Finally, Upstart is also increasing its investments in countercyclical offerings, including its HELOC product, which has reached $5 million in cumulative originations since it launched in 2023.
Can Upstart turn its stock's performance around?
Upstart stock is likely to get a boost if interest rates come down or there are signs of the economy weakening, but the company's initiatives to drive business right now may be more important for turning the stock around.
It will likely take a few quarters or more for those initiatives to show up on the bottom line, but investors should pay attention to the company's initiatives beyond loan originations as that could be key to stable profits.
If rates remain elevated, Upstart will need to pivot its business to deliver returns for investors. At the very least, management is working toward that goal.
