- Upstart (UPST) crashed and burned on its earnings headline.
- The drop is out of scale with the results.
- Investors must make swift choices before it becomes too late (get in or get out).
Upstart (NASDAQ:UPST) stock crashed in fantastic fashion this week. Management reported a strong quarter but the investors absolutely hated it. The scorecard showed that they grew sales 150%, but Wall Street wanted more. As most often is the case, the problem was that they offered tepid guidance. Management lowered the outlook by a mere 10%, but it still spooked traders.
The drop was way too large to be a simple tantrum. We rarely see crashes of this magnitude occur without serious flaws in execution. UPST fell 60% at one point on the knee jerk reaction. Stocks that have announced they were delisting suffered less pain on their headlines. At the end of the day, Upstart delivered $310 million in revenues up from $121 million last year. That’s an impressive improvement that doesn’t deserve this kind of beating yet. The company even eked out a positive net income; albeit, at a drop in cash from operations.
UPST Stock: Shock Value Is the Variable
To be fair to UPST, there were outside factors that may have exaggerated the move. All year the S&P 500 has been falling almost non stop. We’ve lost 16% from the January highs, and that’s not all about the war in the Ukraine. That headline didn’t hit until late February. So a big part of why the indices blight is from the war on inflation.
The Federal Reserve made it its sole mission to restore price stability. Judging by the rhetoric, I would say they are willing to do it at all costs. The health of the economy will be collateral damage. Frankly, this is shocking, but it is happening and fast. Those are factors that made investors extra jumpy, which may have out-sized the selling jag in Upstart.
However, the Fed’s actions may create a new normal for Upstart, which may have started to materialize already. The company passes loans through its books to outside investors. Last quarter they may have encountered bottlenecks on that front. The higher rates make for fewer willing lenders, and may also increase the rate of defaults. Since these are mostly auto loans, they will not likely be a priority and fail early.
The higher rates could also dry up demand for future products and services. Loans are a fickle business that shuts down at the drop of a hat. Even though the Fed can’t directly control consumer loan rates, they influence them heavily. Case in point, the 10-year U.S. treasury now yield about 3%.
Don’t Bury Your Head In the Sand
This Fed ripple effect could reverberate into the economy and exacerbate the tightening cyclone. Consumer spending would also impact the GDP in a big way since it is two thirds of it. We’ve already seen our first negative figure there.
Still, investors’ concerns over the future of the UPST business are valid, but there is still hope. While the spending belts are tight, people will still need loans. Upstart has the technological advantage to adjust to demand levels. Its efficiency should be able to offset the drags from the macroeconomic challenges that are arising.
Before the week is over, investors have decisions to make. Those long the stock will probably realize that it’s too late to exit. Doing so would be accepting a large loss at new lows. New investors must decide quickly before the window of opportunity closes. A fall this big might carry forward a few days from margin calls.
But UPST moves fast, so if there were to be a bounce, it could come quickly. Although it may not be the same stock that rallied 400% last year, it just proved that it loves to shock us. Investors must own it, or completely forget about its existence.
On the date of publication, Nicolas Chahine did not have (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.