What Happened:
Shares of AI lending platform Upstart (NASDAQ:UPST) fell 18.3% in the morning session after the company reported second quarter results, which narrowly surpassed Wall Street's revenue estimates. Transaction volume missed and was down significantly year on year. Also the conversion on rate requests was 9%, below the expectation of 10%.
Management hinted at some of the difficulties faced during the quarter, adding that "While the economic environment continues to be challenging, Upstart has the opportunity to grow quickly and profitably when we return to a normalized economy." It is no surprise that revenue and adjusted EBITDA guidance for the next quarter came in below expectations. On a positive note, earnings per share beat. Free cash flow also turned positive.
Overall, it was a weaker quarter, with some of the key performance metrics falling below expectations and management highlighting a challenging operating environment that might make it hard for the company to achieve its near-term goals.
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What is the market telling us:
Upstart's shares are very volatile and over the last year have had 100 moves greater than 5%. But moves this big are very rare even for Upstart and that is indicating to us that this news had a significant impact on the market's perception of the business.
The previous big move was three months ago, when the stock gained 35.6% on the news that the company reported first quarter results that exceeded analysts' revenue, adjusted EBITDA, and earnings per share (EPS) estimates. However, the company continued to burn cash. Revenue guidance for the next quarter came in above Consensus and the company expects adjusted EBITDA to be nearly breakeven, which is a major milestone.
What makes the company unique in the SaaS space is its exposure to lending. Given recent failures and other difficulties in the banking sector, there was added uncertainty coming into this quarter. Management addressed these concerns by providing positive commentary that "despite macro challenges, we secured multiple long-term funding agreements, together expected to deliver more than $2 billion to the Upstart platform over the next 12 months."
Upstart is up 170% since the beginning of the year, but at $34.77 per share it is still trading 51.8% below its 52-week high of $72.09 from July 2023. Investors who bought $1,000 worth of Upstart's shares at the IPO in December 2020 would now be looking at an investment worth $1,180.
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