Why Shares of Upstart Crashed Today

What happened

Shares of the artificial intelligence lender Upstart (UPST -20.15%) are trading nearly 20% lower as of 10:20 am ET today after the company announced preliminary second-quarter results that disappointed the market.

So what

Upstart said yesterday that it expects to generate only about $ 228 million of revenue in the second quarter of the year, which is significantly lower than the $ 295 million to $ 305 million it had initially guided for. Furthermore, Upstart expects to lose between $ 27 million and $ 31 million in the quarter, also a much wider loss than anticipated.

“Our revenue was negatively impacted by two factors approximately equally. First, our marketplace is funding constrained, largely driven by concerns about the macroeconomy among lenders and capital market participants,” Upstart’s CEO David Girouard said in a statement.

Girouard added: “Second, in Q2, we took action to convert loans on our balance sheet into cash, which, given the quickly increasing rate environment, negatively impacted our revenue.”

When Girouard talks about converting loans to cash, I believe he is saying the company took losses on loans previously held on its balance sheet. As you may recall, investors sold off the stock intensely when they found Upstart was using its balance sheet to fund loans that had not been funded by investors.

Three analysts have already come out bearish on the stock this morning. JMP Securities analyst Andrew Boone downgraded Upstart this morning from “outperform” to “market perform,” saying he is not sure how revenue will fare this year.

Stephens analyst Vincent Caintic maintained his “underweight” rating and a price target of $ 28. He also said he thinks the revenue trajectory “will get worse from here” due to funding issues with the capital markets.

Now what

While it may be tempting to want to buy the dip here, I am advising investors to avoid this fintech stock right now. Upstart may have trouble drumming up investor demand for its loans. Rising interest rates will likely increase loan defaults, and the economy could be heading into a recession. This will likely slow origination volume considerably.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

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