Why Upstart Holdings fell 31% in March

What happened

Assets received ( UPST 4.26% ) had a rocky month of March, with its stock price dropping 31%, according to S&P Global Market Intelligence. Fintech has fallen behind S&P500, up 3.6% in March. Upstart trades at around $115 per share, down about 24% year-to-date to April 4.

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So what

Upstart Holdings is a consumer finance company that uses artificial intelligence (AI) to manage loan applications. About 70% of its loan applications are fully automated, and about two-thirds are approved instantly via AI. Although it is not a full service bank, it partners with banks to provide the loans. It also allows other banks and credit unions to use its technology platform for a fee.

Upstart released its fourth-quarter and full-year results in February, which showed a 252% year-over-year revenue gain in the fourth quarter and a 264% annual revenue gain in 2021 from compared to the previous year. Fourth quarter gains were driven by a 301% increase in loans originated by banking partners. The young company posted net income of $58.9 million in the most recent quarter, up $1 million year-over-year.

But from March 2 to March 14, the stock price plunged from around $157 per share to around $89 per share, a decline of 43%. What caused the decline?

Now what

A few months ago, Upstart’s stock price dropped dramatically after a meteoric rise to $400 per share in October. It had been heavily overvalued, like many growth stocks due to the ramp up from 2020 to 2021, only to then crash.

So, while the price-to-sales (P/S) ratio of 12 and the price-to-earnings (P/E) ratio of 50 have come down to more reasonable levels, new geopolitical and macroeconomic concerns have emerged. Inflation has not subsided and there are fears of a recession or economic slowdown due to the Russian invasion of Ukraine. An economic downturn would hurt lenders.

But there were a few other things that might have confused investors. In February, Upstart announced a share buyback plan, which is not typical for a young, growing company, as excess capital is often used to invest in the business.

Additionally, Wedbush Securities downgraded Upstart to sell due to the risks of relying on third-party funding during a recession or market turmoil, and weakening delinquency trends. On the other hand, Upstart is eyeing the auto loan market, which will significantly increase its addressable market and revenue opportunities. This is a stock to watch over the coming quarters.

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Rosalie M. Dehner