Shares of personal, auto, and home loan fintech Upstart (UPST 5.06%) sank 30.6% in February, according to data from S&P Global Market Intelligence.
Upstart reported fourth-quarter earnings that, at first glance, looked really positive; however, some investors took forward guidance to mean its new lending products might have lower margins going forward. Additionally, Upstart also announced a CEO transition, which may have added to the uncertainty and contributed to the sell-off.
NASDAQ: UPST
Key Data Points
Upstart sees loan originations surge
In the fourth quarter, Upstart grew revenue 35.2% to $296.1 million, with earnings per share of $0.17, relative to a slight loss in the year-ago quarter. Both figures beat analyst expectations.
Additionally, management guided to better-than-expected revenue in the year ahead, forecasting $1.4 billion in 2026 revenue, above Wall Street's consensus of $1.27 billion.
The original reaction to those earnings was actually positive when first reported, before an ugly reversal the next day. This could be for a couple of reasons.
First, Upstart announced a CEO change, with co-founder Paul Gu taking over for Upstart's other co-founder, Dave Girouard, who will become Chairman. But while CEO transitions sometimes cause sell-offs due to uncertainty, this one appears to offer significant continuity, and doesn't seem to be a negative catalyst. Despite being co-founders of Upstart, Gu is much younger than Girouard, so this seems like a natural hand-off.
A more likely reason could be concern over Upstart's diminishing "take rate" on the loans it's originating. Remember, Upstart uses AI to originate loans to borrowers who may not qualify for a loan otherwise, and it doesn't have a banking license that would allow it to hold its loans against deposits. So, the company depends on external loan buyers for growth.
And while buyers have certainly been returning to purchase Upstart's loans following the regional banking crisis of 2023, it appears they aren't paying as much per loan. Even last quarter, while revenue was up 35%, originations were up 52%, showing a lower revenue per loan sold than last year. And while management forecasts very strong top-line growth in the year ahead, it also projected adjusted EBITDA margins of 21% for 2026. That would be a one percentage point margin decline from the fourth quarter's mark. Typically, margins increase as a company scales up, rather than decline.
Image source: Getty Images.
Working harder for the same growth?
In essence, it appears investors may be worried that Upstart's reliance on larger institutional buyers is depressing take rates and margins in exchange for volume.
Now, as long as Upstart can sell enough loans, that shouldn't necessarily matter to results. However, with earnings just now reversing from losses to profits, it's hard to get a sense of profitability a couple of years out.
While the stock could have significant upside if the economy remains intact and interest rates decline, Upstart is a risky buy at 63 times trailing earnings and 29.5 times forward earnings estimates, even after February's pullback.
