We're still close to the start of 2024, but even with a new year, some things haven't changed. Upstart (UPST 2.76%) once again revealed disappointing financial results for the three-month period that ended Dec. 31. Shares are down 18% since the announcement on Feb. 13 (as of Feb. 15).
The artificial intelligence (AI)-powered lending platform continues to struggle amid a higher-rate environment. Management's guidance didn't give the market much confidence as we look ahead.
Although this fintech stock is currently trading 93% below its all-time high, which was set in October 2021, I think it's a smart idea for investors to pass on Upstart right now.
Looking at the latest results
Upstart approved $1.3 billion worth of loans in the fourth quarter of 2023; that figure was down 19% compared to the year-ago period. Revenue totaled $140 million, representing a 4% decrease. On a percentage basis, these declines aren't as bad as they were in the first quarter of 2023, but that's because Upstart is lapping favorable comps due to poor results in the fourth quarter of 2022.
The company continues burning through cash, reporting a Q4 net loss of $42 million, bringing the total for 2023 to $240 million. Even though CEO Dave Girouard said, "The numbers will show that we've actually become more efficient in 2023," the data just doesn't back up this claim.
For the current quarter, executives forecast revenue of $125 million and a net loss of $75 million. This probably disappointed Wall Street even more.
Easy to be pessimistic
Despite its ongoing challenges, investors will find it easy to appreciate what Upstart has done by creating an alternative to the traditional FICO lending model. Upstart's AI-backed technology factors in 1,600 different variables to better analyze a potential borrower's ability to pay back a loan. By better assessing risk, Upstart can broaden the availability of credit to more consumers. And for the company's more than 100 banking partners, using Upstart's platform could increase revenue opportunities.
It also helps that 89% of loans were fully automated. This means there was no human interaction throughout the whole process. This can improve the customer experience.
Upstart's founders also did a great job by targeting a truly massive industry. The market for personal loans, small business loans, home loans, and auto loans is estimated to be worth $3 trillion on an annual origination basis. Since its founding in 2012, Upstart has approved $36 billion worth of loans, so in theory, it has a huge growth opportunity in front of it.
However, it's easy for investors to be extremely pessimistic when they look at this business. Over the last couple of years, Upstart has proven just how sensitive it is to broader economic forces, which are totally outside of its control. When interest rates are low like they were during the worst days of the pandemic in 2020 and 2021, Upstart saw its growth absolutely skyrocket, and it was producing positive net income.
But since the Federal Reserve started hiking interest rates at the beginning of 2022, Upstart began to face an uphill battle. Borrowers are less inclined to take out loans when their monthly payments increase. And banks tighten up their lending standards to minimize defaults. Although the market is expecting interest rates to drop this year, there's no reason to believe that Upstart will get to profitability anytime soon.
Unless the company can register healthy growth and positive net income on a consistent basis over a full economic cycle, investors should stay far away from the stock. There's just too much risk and uncertainty right now.
