Why Upstart Holdings fell 23.1% in July

By on August 2, 2022 0

What happened

Shares of Assets received (UPST -1.60%) fell 23.1% in July, according to data from S&P Global Market Intelligence. The artificial intelligence (AI)-based lending platform announced unaudited preliminary results for the second quarter, severely missing its previous revenue and net revenue guidance. As of this writing, 2021 top flight stocks are down 85% year-to-date.

So what

On July 7, Upstart pre-announced its second quarter results covering the three months ended June. Revenue is expected to be $228 million in the period, missing management’s previous forecast for $295 million to $305 million in revenue by a significant margin. This revenue loss negatively impacted Upstart’s profitability, with an expected net revenue loss in the range of $31-27 million compared to previous guidance of a net loss of $4-0 million. dollars.

What is causing this huge revenue slowdown? According to management, two things. First, with recession fears and rising interest rates, capital markets are tightening and not lending as much money. Upstart makes money by taking fees from loans processed through its artificial intelligence engine. Thus, when he deals with less capital, his income decreases. Second, to ease investor concerns, Upstart liquidated the loans on its balance sheet and converted them to cash. With interest rates rising, this negatively impacted revenue and profitability for the period, but should only be a one-time hit as management said it was done with retaining loans on its own balance sheet.

Now what

With such a drop in shares, Upstart trades at a market cap of just $2 billion. Its market cap was down $30 billion from a year ago. At current prices, the stock is trading at a price-to-sales (P/S) ratio of around 2 and a price-to-operating earnings (P/O) ratio of 12. Clearly, investors generally don’t believe not to the sustainability of Upstart’s historic revenue growth and profitability. With how much the company missed its internal targets this quarter, I don’t blame them.

However, if you believe in Upstart’s AI-powered lending platform, now might be the time to buy some stock. But if you don’t understand the business or are wary of fintech companies, it’s best to stay away even with such a drop in stocks.

Brett Schafer has no position in the stocks mentioned. The Motley Fool holds positions and endorses Upstart Holdings, Inc. The Motley Fool has a Disclosure Policy.