Upstart stock sinks as tough lending landscape drives downbeat earnings outlook

Upstart Holdings Inc. has struggled to contend with a tougher lending environment, and the company indicated Tuesday that its challenges are expected to continue.

The financial-technology company, which uses artificial intelligence to inform lending decisions, delivered a lower-than-expected forecast for the current quarter, as Chief Executive David Girouard called out high interest rates and “an environment where banks continue to be super cautious about lending.”

For the third quarter, Upstart

expects $140 million in revenue, while analysts had been anticipating $155 million. The company also models $5 million in adjusted earnings before interest, taxes, depreciation and amortization (Ebitda), while analysts were looking for $9.6 million in adjusted Ebitda.

Upstart shares tumbled more than 19% in Tuesday’s after-hours action.

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Chief Financial Officer Sanjay Datta, meanwhile, explained that the “ongoing supply of loans on offer in the secondary markets by sellers anxious for liquidity contributes to a challenging market dynamic, with loan books being sold at bargain prices and creating no shortage of buying opportunities for selected investors.”

“Our view is that it will take some time for the market to work its way through this surplus of cheap available yield,” he said. “Despite this, we continue to pursue a number of promising discussions with prospective funding partners, aimed at bringing more committed capital to the platform, and believe that we will be well positioned once the loan market returns to a more traditional state of pricing equilibrium.”

Though Datta said Upstart moved in a “promising direction this past quarter,” he also acknowledged there’s “much work to be done to restore our business to the scale and growth that we aspire to.”

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The company reported a second-quarter net loss of $28.2 million, or 34 cents a share, compared with a loss of $29.9 million, or 36 cents a share, in the year-earlier period. On an adjusted basis, Upstart earned 6 cents a share, whereas analysts tracked by FactSet were modeling a 7-cent loss per share.

Revenue fell to $136 million from $228.2 million. The FactSet consensus was for $135.2 million. The company generated $144 million in fee revenue, compared with the $131 million that analysts were expecting.

Upstart’s lending partners originated 109,447 loans across its platform in the second quarter, totaling $1.2 billion. Conversion on rate requests was 9%, down from 13% in the same period a year prior.

Though Upstart beat on adjusted earnings, it “signaled that macro pressure is not set to abate in Q3, with credit performance and the funding markets still buffeted by a challenging economic environment,” Barclays analyst Ramsey El-Assal wrote in a note to clients Tuesday. “With a new Q3 guide that came in below Street estimates, we expect shares to be down in tomorrow’s tape.”

Shares of Upstart have rocketed 291% so far in 2023, through Tuesday’s close, as the S&P 500
has risen 17%.

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