Downtrend for Upstart: AI Lending Platform Fails to Execute in Q3

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Upstart (NASDAQ:UPST) is an artificial intelligence-enhanced lending marketplace where machine learning supposedly makes the loan process fairer and more efficient. That’s all fine and well, but if Upstart can’t demonstrate financial viability, then UPST stock is destined to end up as a mere footnote to history’s chapter about zombies and meme stocks.

In 2021, AI and lending undoubtedly seemed like a match made in heaven. What could possibly go wrong when robots control people’s access to capital?

Then 2022 and 2023 came around, along with higher-for-longer interest rates. Lenders slowed down their lending activity. Startups like Upstart weren’t the market darlings they once were. Now all that’s left for investors are the remnants of dreams as easy-money policy ends and another brilliant business concept goes awry.

Can’t say you weren’t warned

I don’t always agree with short-sellers’ assessments, but Bleecker Street Research’s warning about Upstart in September might actually have been spot-on. According to The Fly, the firm saw “many looming issues” with Upstart, not the least of which were the “severe regulatory issues” the company allegedly faced.

Furthermore, Bleecker Street Research doubted that Upstart’s “AI platform enables it to make superior credit decisions.” Not only that, but the short-selling firm felt that the “substance behind much of” Upstart’s “hype is very flimsy” and that Upstart “has no marketing advantage, no production advantage, and no distribution advantage.”

To cap off its scathing indictment, Bleecker Street Research concluded that UPST stock “could very well trade at a large discount if and when capital markets run into liquidity challenges.” Now here we are in November 2023, and while I can’t confirm all of Bleecker Street Research’s allegations, Upstart shares are definitely trading “at a large discount.”

It was absolute carnage in after-hours trading on Nov. 7, with UPST stock down 22% with unusually heavy volume. Now pushed down to $22 and change, the stock that once traded near $400 in 2021 was in free fall.

This wasn’t just a sell-off; it was panic. What could possibly have precipitated this, and is there a prime buy-the-dip opportunity here with Upstart stock?

“Conservative mode” won’t be enough to save Upstart

“We’re making rapid progress in building the world’s first and best AI lending platform,” Upstart CEO Dave Girouard proudly declared in the company’s third-quarter earnings press release.

Before anybody jumps for joy, they should heed Girouard’s follow-up remark: “Of course we’d prefer to be growing quickly, but this is a time when it’s wise to be operating in a conservative mode.”

Difficult as it may be, I’ll do my best to ignore the cognitive dissonance between, “We’re making rapid progress,” and, “We’d prefer to be growing quickly.” Beyond that, I’ll give Girouard and Upstart credit for “operating in a conservative mode,” assuming this means reducing expenditures in Q3.

Specifically, Upstart’s total operating expenses declined from $215.324 million in the year-earlier quarter to $178.402 million in 2023’s third quarter. Yet, retrenchment should only be considered one piece of the puzzle. Unfortunately, Upstart’s other quarterly stats don’t seem to indicate “rapid progress.”

As it turned out, Upstart’s revenue declined 14% quarter over quarter to $134.557 million, falling short of the $140 million the company expected and the $139.7 million that analysts had called for. Moreover, Upstart reported a GAAP loss of 48 cents per diluted share, while on an adjusted basis, it reported a loss of 5 cents per diluted share, which is worse than the analysts’ consensus estimate of a loss of 2 cents per share.

Outlook: “Approximately $0”

Perhaps to save face, Girouard boasted that Upstart was “EBITDA positive for the second straight quarter” in the most recent quarter. However, it’s not so encouraging that the company’s management expects it to report EBITDA of “approximately $0” in the current quarter.

Also for the fourth quarter, Upstart guided for an approximate net earnings loss of $48 million and an adjusted net loss of $14 million. Thus, the company will almost certainly post another unprofitable quarter.

Even beyond Bleecker Street Research’s warning signals, this outcome was practically inevitable. UPST stock surged this past summer on AI hype, but now elevated interest rates are separating the viable from the unreliable.

As a result, the market is expressing its disappointment in Upstart’s results and punishing the company and its shareholders. Maybe in time, stock traders will learn to vet speculative start-ups before rushing into them — rather than rushing to the exits when the results doesn’t match the hype.