Artificial intelligence (AI) lending platform Upstart (NASDAQ:UPST) just disclosed weak second-quarter earnings and Q3 guidance. Now, UPST stock is slipping more than 10% amid growing concerns that its AI-driven innovation may not be up to snuff against rising macroeconomic pressures.
For its Q2 report, Upstart delivered earnings per share (EPS) of 1 cent, well below Wall Street’s estimate of 10 cents. The company also rang up $228 million in revenue, representing an 18% lift year-over-year (YOY). However, that tally missed the consensus target of $241.6 million for the period.
Making matters worse, prior to the Q2 disclosure, Upstart admitted that the company would fall short of the original revenue estimate of between $295 million and $305 million for the three months ended June 30. Before this guidance, covering analysts had anticipated Q2 sales of $335 million. Following the guidance, however, analysts dropped their target to $298 million.
Unfortunately, those hoping for better news ahead for UPST stock have also been sorely disappointed again. For Q3, management is now guiding for $170 million in revenue. Analysts had been anticipating a sales haul of $249 million, a glaring 32% miss.
Viability Concerns Now Surround UPST Stock
Because Upstart is not a bank but a lending platform, it’s dependent on its partnerships with financial institutions. However, macroeconomic pressures are starting to weigh on banks and credit unions, imposing a downwind squeeze on UPST stock.
CEO Dave Girouard says Upstart’s banking partners “have seen consistently strong credit performing.” But he also acknowledges that some firms “have paused or reduced originations due to fear about the future of the economy.” The CEO explained the following during Monday’s earnings call:
“Today, we reported a decline in revenues, which is obviously disappointing and unacceptable to us […] It may be natural for you to question whether Upstart’s AI-powered risk models aren’t working as designed. But we’re confident this isn’t the case […] our models continue to improve with respect to accuracy and risk separation.”
That said, questions about integrating technology to drive critical decisions likely won’t go away anytime soon. With the tech sector increasingly laying off workers, Upstart’s management needs to bring in some big positives to the table. Otherwise, UPST stock may continue to tread in uncertain waters.
Why It Matters
Looking forward, UPST stock investors will also want to keep close tabs on the Federal Reserve. While the tech sector isn’t benefitting from the surge, the July jobs report came in well above expectations. Ordinarily, that represents fantastic news. But the resilience of the labor market also translates to higher wages, which in turn means more inflation.
With the Fed already acting aggressively relative to modern monetary policy standards, further tightening of the spigot could mean a sharp lift in borrowing costs. That would not be helpful to banking institutions, representing a worrying dilemma for UPST stock.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
