As growth stocks continue their heady (but never completely steady) climb on Wall Street, the question remains: When are triple-digit gains not enough?
Upstart Holdings, an online lending platform underpinned by artificial intelligence (AI), reported results on Wednesday (Nov. 10) after the market closed that showed triple-digit percentage gains across most metrics.
On Wednesday morning, stock was down more than 16%, trading at about $262, well off recent peaks of more than $401. Even with the current slide, they’re trading well above last year’s IPO price of $20.
The company reported that revenue rose 250% year over year to $228.4 million in the third quarter. Transaction volume was $3.1 billion, up more than 241% over the $909 million seen a year ago and up about 12% sequentially. Earnings rose to $29.1 million, from $9.7 million a year ago.
A deeper dive into the data shows the continued transformation of lending away from the manual processes that have dominated the space toward automated, online conduits. As a result, management noted, lending volume is continuing to ride an upswing.
In the third quarter last year (before its IPO), the company originated just under 81,000 loans. That tally surged to just under 363,000 in the most recent quarter — a growth rate of about 348%.
Management also noted that through the six years leading up to the IPO, the company originated 620,000 loans, while cumulatively in the year since the IPO, Upstart’s bank and credit union partners originated more than 1.5 million Upstart-powered loans — worth more than $16 billion in originations.
According to its supplementals, Upstart’s total addressable markets are $4.5 trillion for mortgage loans, auto loan originations stand at $672 billion and personal loan originations are at $81 billion.
An Expanded Footprint
Management also noted that Upstart has been “methodically expanding” its footprint. The company is casting a wider net across the credit spectrum, aiming to catch both prime borrowers and would-be borrowers with poor credit scores.
Addressing declining stock prices, Finance Chief Sanjay Datta said on the call that the higher volumes have also exerted “downward pressure” on the platform-wide conversion rate, down sequentially from 24.4% to 23%. At the same time, the percentage of loans originated automatically slipped to 67% from 71%.
“Newer borrower profiles will tend to have more conservative rates of instantaneous approval until we develop a longer history and greater loan volume for our models to train on,” he said.
The company may also hit other speed bumps. Datta noted that “we are seeing the early signs of a return to the pre-COVID consumer profile, with personal savings rates in the economy now having fallen back to pre-COVID levels, and credit card balances steadily edging upwards to within 90% of pre-COVID levels.”
Those factors will eventually lead to a rise in default rates to pre-COVID levels, he predicted. “We believe that any issuer who has not priced this in is likely to experience a deterioration in the performance of their returns,” said Datta. Upstart’s own models, then – with a focus on advanced technologies to help manage risk – may be further tested down the line, along with the industry at large.
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