High interest rates take a toll

Will every business connected to artificial intelligence (AI) be a clear winner by 2024? Upstart Holdings (NASDAQ:UPST) is testing this idea today as its stock falls sharply in value.

The company’s basic concept seemed to make perfect sense last year. If AI is the silver bullet to make everything more efficient, why not apply it to the lending process?

That’s exactly what Upstart does, and the market has clearly favored this proudly disruptive AI-enabled lending facilitator in the summer of 2023. The AI ​​craze hasn’t died down since then, but U.S. monetary policy certainly hasn’t made it easier for Upstart to do business. Recently.

remember better times

Back last summer, the outlook was much brighter, as Upstart Holdings reported earnings per share for the second quarter of 2023. But one data point doesn’t make a pattern, and unfortunately Upstart ended up with a loss per share. In the next two quarters.

UPST stock prices have also fallen since last summer, falling from $70 to less than $30. Shares fell 20% this morning as traders assessed Upstart’s fourth quarter and full-year 2023 financial results.

Because Upstart Holdings has no revenue and therefore no trailing price-to-earnings (P/E) ratio, it is difficult to assign a meaningful valuation to the company. For what it’s worth, Upstart’s trailing 12-month price-to-sales (P/S) ratio is about 5, which is nearly double the sector’s median P/S ratio of 2.52.

That assessment may have been more palatable when it seemed inevitable that the Federal Reserve would cut interest rates at least six times in 2024, including at its January and March meetings. However, there was no rate cut in January, and a rate cut at the March meeting now looks much less likely.

In other words, a short-term interest rate policy seems likely this year, and rising borrowing costs may continue for some time. This is typically a problem for companies with low profitability, but it’s even more severe for Upstart Holdings because its business relies on strong borrowing and lending activity.

That said, Upstart Holdings’ AI connections may not be enough to sustain it and excite investors when the Fed isn’t eager to cut interest rates. With that in mind, let’s take a look at Upstart’s quarterly statistics to see if they indicate significant growth for this exciting lending marketplace startup.

Not a bad end of the year

If you’re someone who values ​​profitability, you probably won’t like Upstart Holdings’ fourth quarter results. But comparatively speaking, Upstart ended 2023 on an overall positive note. At least that’s what CEO Dave Girouard thinks about it.

He proudly declared, “Despite the difficult lending environment, we achieved solid results this year.”

“Robust” is a vague term, but the fourth quarter numbers seem to support Girouard’s claims. During the quarter, Upstart’s revenue fell 4% year-over-year to $140 million. However, this is a 4% increase compared to the previous quarter. Additionally, Upstart surpassed analysts’ consensus estimates of $134.8 million.

Considering that the company originated 129,664 loans in the fourth quarter, this is actually quite impressive. This is a 19% decrease compared to the same period last year. Perhaps this is due to high borrowing costs.

So now the bottom line is that Upstart Holdings reported an adjusted net loss of $9.7 million in its fourth quarter. This indicates that the profitability gap has narrowed, as the company posted an adjusted net loss of $20.9 million in the year-ago quarter.

a cautious outlook

It wasn’t Upstart Holdings’ quarterly results that disappointed investors. Rather, the culprit was this quarter’s guidance.

“Going forward, we remain cautious about the near-term outlook for our business and will continue to operate responsibly in this environment,” Girouard warned investors.

With this cautious statement, Upstart Holdings put its revenue for the quarter at $125 million. That’s well short of the $152 million that Wall Street was asking for.

Moreover, Upstart expected an EBITDA loss of $25 million in the first quarter, while analysts expected positive adjusted EBITDA of $5 million. So the market’s negative reaction is now starting to make sense.

Wedbush analyst David Chiaverini made the market’s concerns clear, writing, “We are concerned that challenges in credit quality performance combined with macro risks could continue to weigh on the appetite of Upstart’s credit buyers and the securitization market.”

He also reaffirmed an Underperform rating on UPST stock and assigned a very pessimistic $10 price target.

Chiaverini’s concerns were rightly noted. Despite its big, vaunted AI angle, Upstart won’t find success easily in a long-term interest rate environment. Therefore, it is wise for investors to look for clues from the Federal Reserve (FRB) rather than hastily jumping into trading with Upstart stock.