Is every business connected to artificial intelligence (AI) a surefire winner in 2024? Upstart Holdings (NASDAQ:UPST) is putting this concept to the test as its stock rapidly loses value today.
The corporate’s underlying concept appeared to make perfect sense last 12 months. If AI is the silver bullet that makes every part more efficient, why not apply AI to the lending process?
That’s what Upstart does, and the market definitely favored this proudly disruptive, AI-enabled lending facilitator in the summertime of 2023. AI fever hasn’t evaporated since then, but U.S. monetary policy definitely hasn’t made it easy for Upstart to conduct businesses these days.
Remembering higher times
Going back to last summer, the outlook was much brighter as Upstart Holdings reported a per-share profit for the second quarter of 2023. Yet, one data point doesn’t make a pattern, and unfortunately, Upstart fell back to per-share losses in the next two quarters.
The UPST stock price has also declined since last summer, dropping from $70 to lower than $30. This morning, the share price fell 20% as traders assessed Upstart’s fourth-quarter and full-year 2023 financial results.
Since Upstart Holdings has no earnings and due to this fact no trailing price-to-earnings (P/E) ratio, it’s difficult to assign a meaningful valuation to the corporate. For what it’s value, Upstart’s trailing 12-month price-to-sales (P/S) ratio is around 5, which is sort of double the sector median P/S ratio of two.52.
This valuation can have been more palatable when it seemed inevitable that the Federal Reserve would cut rates of interest at the very least half a dozen times in 2024, including at its January and March meetings. Nonetheless, there was no rate cut in January, and a March-meeting rate cut seems much less likely now.
In other words, higher-for-longer interest-rate policy looks like a possibility for this 12 months, and better borrowing costs could also be here to remain for some time. That’s an issue for unprofitable businesses normally, nevertheless it’s even worse for Upstart Holdings since its business is determined by robust borrowing and lending activity.
In other words, Upstart Holdings’ AI connection won’t be enough to maintain it afloat and get investors excited when the Federal Reserve isn’t desirous to cut rates of interest. With that in mind, let’s see if Upstart’s quarterly stats indicate decent growth for this intriguing lending-market start-up.
Not a nasty end to the 12 months
When you’re a stickler for profitability, then you definitely probably won’t like Upstart Holdings’ fourth-quarter results very much. Nonetheless, comparatively speaking, Upstart ended 2023 on a generally positive note. At the very least, that’s how CEO Dave Girouard feels about it.
He proudly declared, “Despite the difficult lending environment, we delivered solid results to finish the 12 months.”
“Solid” is a vague term, however the Q4 numbers appear to support Girouard’s contention. Through the quarter, Upstart’s revenue declined 4% 12 months over 12 months to $140 million. Nonetheless, that’s up 4% in comparison with the prior quarter. Moreover, Upstart beat the analysts’ consensus estimate of $134.8 million.
That’s actually pretty impressive, considering the corporate only originated 129,664 loans in Q4, down 19% 12 months over 12 months. Probably, that is attributable to high borrowing costs.
Turning now to the underside line, Upstart Holdings reported an adjusted net lack of $9.7 million within the fourth quarter. This represents a narrowing of the profitability gap, because the company incurred an adjusted net lack of $20.9 million within the year-earlier quarter.
A cautious outlook
It wasn’t Upstart Holdings’ quarterly results that disillusioned investors. Somewhat, the perpetrator was its current-quarter guidance.
“Looking ahead, we remain cautious concerning the near-term outlook for our business, and we’ll proceed to operate responsibly on this environment,” Girouard warned investors.
With that cautionary statement, Upstart Holdings guided for current-quarter revenue of $125 million — a figure that fell far wanting Wall Street’s call for $152 million.
Furthermore, Upstart guided for an EBITDA lack of $25 million for the primary quarter, whereas analysts had forecast positive adjusted EBITDA of $5 million. Thus, the market’s negative response starts to make sense now.
Wedbush analyst David Chiaverini articulated the market’s concerns, writing, “We fear that difficult credit-quality performance combined with macro risk could proceed to pressure appetite from Upstart’s credit buyers and the securitization market.”
He also reiterated his Underperform rating on UPST stock and assigned it a deeply pessimistic $10 price goal.
Chiaverini’s concerns are duly noted. Even with a loud-and-proud AI angle, Upstart can’t easily thrive during a higher-for-longer interest-rate environment. Due to this fact, it’s clever for investors to attend and watch and search for clues from the Federal Reserve moderately than jump right into a hasty trade with Upstart stock.