Why fintech stocks are soaring

Startup Holdings (NASDAQ:UPST) can be considered a prime example of the irrational craze that has sent tech stocks soaring in 2020 and 2021. But the bubble burst and it plummeted in late 2021 and 2022.

Shares of Upstart, which deploys artificial intelligence (AI) to process loan requests, soared to $400 per share in October 2021, less than a year after its December 2020 IPO at about $26 per share. Now, less than four years later, the wild move that took the stock from $26 to $400 and then back down to a low of $12 per share has put it right back where it started at $26 per share.

I won’t go into detail about the short and volatile history of Upstart stock. However, I will tell you that on Thursday it jumped 13% just two days after the company released its first quarter earnings report. Let’s see if this rise is a sign of momentum or just an indication of increased volatility in the stock.

Streamline operations

Like most young companies expanding their operations, Upstart faced high costs. But rising inflation and rising interest rates have made these costs much higher, making borrowing and growth investments more expensive.

Nonetheless, Upstart has made progress in streamlining operations and lowering costs while increasing profits. The fintech company generated $128 million in revenue in the first quarter, up 24% from a year ago and ahead of analysts’ estimates.

Upstart posted a net loss of $65 million in the quarter, down from a net loss of $129 million in the same quarter a year ago but worse than the $45 million net loss in the previous quarter. The company also reported a net EBITDA loss of $20 million, compared to $31 million a year ago.

Despite these losses, Upstart made significant progress lowering costs during the first quarter, reducing operating expenses by 17% year-over-year to $195 million.

“There are many reasons to believe that our business will soon return to growth, but we are prepared for the current macroeconomic situation to persist. Therefore, we remain focused on improving efficiency and financial performance while investing responsibly for the long term,” Upstart CEO and co-founder Dave Girouard said on the earnings call.

The company did this by minimizing hiring, reducing staff, flattening its organizational structure, limiting cloud infrastructure costs, and reallocating resources to high-priority areas.

“Since the beginning of 2024, we have reduced fixed costs from headcount by approximately $20 million per year. Our staffing levels are currently at their lowest since the third quarter of 2021,” Girouard said.

Ultimately, the company expects to return to EBITDA profitability by the fourth quarter of this year.

Is Upstart a purchase?

Upstart’s stock fell about 11% after the company reported earnings Tuesday, largely due to the company’s second-quarter results. The company expects revenue of $125 million, down from the first quarter and below the consensus estimate of $141 million. Upstart forecast a net loss of $75 million, higher than the first quarter, and also forecast an adjusted EBITDA loss of $25 million, higher than the first quarter.

A day later, Upstart stock had regained everything it had lost and was up about 13%, back to $26 per share. This sums up the volatile nature of this stock. Investors thought Wednesday’s selloff was too steep and bought back on Thursday.

There’s a lot to like about Upstart, as its technology platform is impressive. This allows customers (banks and financial institutions) to process loan requests in minutes using AI technology. It’s a truly terrible market for startups like Upstart, as the high interest rate environment has not only impacted their finances but has also created a difficult lending environment.

As interest rates begin to fall, the economy improves, and lending activity surges, Upstart will benefit and become profitable. However, there is too much uncertainty to warrant a Buy rating at the moment.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.