Upstart, UPST, Stock Drops 40% On Q1 Earnings Beat – Why?

Upstart Holdings (NASDAQ: UPST) stock is now 90% down from its peak value which is a painful thing for those who bought at the top. The problem is, as ever, valuations are built upon rapid growth, and then that growth turns out to be not so rapid.

This is what has happened here at Upstart. The stock is down as a result of the earnings announcement. Q1 was in fact a beat against expectations. Q1 revenue was $310 million against expectations of $300m. That’s marginally (from $305 m) above Q4 last year and well up from $121,3m a year back for the quarter.

So, that’s all good, it’s guidance for the future which is the problem. Full-year is now expected to be in the region of $1.25 billion instead of the previously expected $1.4b. Adjusted EBITDA is expected to fall to 15% from the 20% reported in Q1.

Also Read: What Do Quarterly Earnings Mean for Investors?

These are not bad results, let’s be clear about that. They’re just not as good – those future expectations – as they were expected to be. Which is what happens to a stock built upon expectations of very fast and continued growth. If and when the growth even slows then valuations of where the company is going to be in two or three years change vehemently. Compound growth at high rates just works that way.

The basics of the Upstart story are still good. The company runs and AI platform which aids in deciding upon loan and credit matters. This is a field where AI really should have a good impact too. The whole idea of even a credit rating is based upon the idea of pattern recognition. If this is happening here then we can expect, with some level of confidence, for that to then happen over there. If folk default on this type of bill, then this other type of loan might also go bad.

This is indeed how credit ratings work. A useful example of patterns being when medical bills were just taken off the standard credit rating. As it turns out not paying one-off surprise medical bills is not an indicator of not paying off a mortgage. So, don’t use the one to predict the other. That’s just from the standard credit ratings agencies.

AI is much better at such pattern recognition than humans. So, an AI system should be better at such credit making decisions. As far as we know this is true too, the Upstart system is better.

So far so good with the strategy. But we’ve also got that grand test of any ratings system to come. The Upstart system hasn’t had to weather a recession as yet – lockdown doesn’t count as household incomes actually went up. The current bet is that the Upstart AI is about to face just that test – so there might even be a certain nervousness about the strategy as well.
The correct drop in Upstart stock is driven by that slowdown in growth. Whether it’s going to continue is the big issue in reaching a valuation.