Upstart is rolling out new products to try and bring in revenue as its core business of consumer loan originations missed expectations in the third quarter. Wall Street isn't showing faith in the company's ability to get back on track in the near future.
The San Mateo, California-based
"From a financial perspective, we'd of course prefer to be growing quickly, but this is a time when it's wise to be operating in a conservative mode," Girouard said on the Tuesday night earnings call.
The company builds AI models for consumer lending and partners with financial institutions to offer the loans and to sell them to other institutional investors. Upstart has faced the same funding challenges for more than a year and has laid
Girouard added that the "difficult consumer lending environment" meant that while loans were in demand, Upstart was approving less than 10% of applicants. The company brought in fee revenue of $147 million in the third quarter, down 18% year over year, and just missing its expectation of $150 million. Originations totaled $1.2 billion in the third quarter, down 34% from the previous year.
Upstart's stock tumbled more than 25% to $21.64, as of Wednesday afternoon, following the company's earnings call. The company projected fee income of $150 million in fee revenue in the fourth quarter, also missing Wall Street's prior estimates.
Vincent Caintic, an analyst at Stephens, said in an interview that the consumer lending environment is challenging, but peers, like OneMain and
"For Upstart, everything's up in the air … whether it's finding funding partners, controlling credit, their underwriting model keeps changing," Caintic said. "To sum it up, everything is going wrong. And even though the consumer is stressed, it just seems that Upstart has a bunch of basics that are not going well. So it's a combination of macro, plus Upstart's own issues."
The company has been originating fewer loans, and buyers have pulled back on investing in those loans, leaving Upstart to tap other strategies for capital. The company has worked to find funding partners, but didn't announce any official agreements this quarter. Though it set ambitious goals for auto lending this year, car loan originations dropped 52% from the previous quarter. Girouard's announcement that Upstart has entered the HELOC space, aiming to speed up the process for consumers, fell flat with analysts, who think the business will take a lot of time and money to produce positive results.
Upstart also highlighted that it had updated its core personal loan underwriting AI model to account for seasonal patterns of loan repayments, which analysts said was underwhelming. Caintic said that factor is table stakes for other lenders. John Hecht, an analyst at Jefferies, wrote in a note that Upstart's confidence in its 15th iteration of the AI was a "surprise," because "seasonality is such a predominant factor in consumer finance and has been for decades."
David Chiaverini, an analyst at Wedbush, gave Upstart an "underperform" rating, writing in a note that the company's reliance on third-party funding is a big risk, and its business model is still hampered. He also expressed concern about the fintech's technology.
"The company has yet to operate through a true recession, which means its underwriting model has yet to be battle-tested," Chiaverini wrote in the note. "We fear that challenging credit quality performance combined with macro risk could continue to pressure appetite from Upstart's credit buyers and the securitization market."
Girouard said on the call that the company is investing in its teams and AI, models are improving and competition has waned — "reasons to remain optimistic about Upstart."
Caintic said Upstart could turn its trajectory around if it focused on its core business instead of adding new strategies, but he doesn't think current management will. He said the company should shift from making decisions like a technology company to making decisions like a lending company.
"I don't think that it's an insurmountable problem that Upstart has, but I do think that it's fundamentally a cultural problem," Caintic said. "They can be fixed. There is demand for the product. There are customers that need to be served. But the way Upstart is going about pursuing it is not the best way forward in terms of their longevity."
