I pity the investor who bought Upstart Holdings (NASDAQ:UPST) on Monday. Trading at $77, the company reported terrible earnings that sent UPST stock off a cliff. Upstart’s share price lost 56% in one day, reducing its market capitalization to $2.8 billion.
In the scheme of things, cutting your annual revenue by 11% isn’t a huge deal. There have been plenty of companies to revise lower and come out ahead by the end of the fiscal year. Upstart could easily do the same. And, it did report net income that was 224% higher than Q1 2021.
However, like the Titanic, something potentially dangerous lies beneath the surface.
I’m talking about the state of its loan business. InvestorPlace’s Ian Bezek recently discussed loans on its balance sheet. It’s important to remember that Upstart is a platform that enables banks to originate more and better loans due to the use of artificial intelligence to assess credit risk — skyrocketed in the first quarter to $604.4 million, from $252 million at the end of December.
Bezek referenced CNBC’s Jim Cramer, who grilled CEO Dave Girouard about all the “bad loans” on its balance sheet. The CEO’s answer was less than convincing.
As I said at the end of April, if the company’s Q1 2022 earnings report didn’t sing, UPST stock was going down.
“A recession could be around the corner. If it’s taking on more borrowers with low FICO scores and they turn out to be duds, UPST stock won’t be $70; it will be half that or worse. Mark May 9 on your calendars. It could be a difference-maker,” I wrote on April 28.
According to its 10-Q, the fair value of Upstart’s loans on its balance sheet jumped 10-fold over Q1 2021. That’s a massive increase. One way to know the level of loans has gone way up: the collection agency fees it paid in the first quarter for loans 30 days or more past due were $1.99 million, more than double Q1 2021.
I would agree with Jim Cramer that the sharp increase in loans on its balance sheet suggests a change in its business model. However, of the $598 million in loans (fair value) at the end of March, just $286,000 were greater than 90 days past due. And of the $598 million, $231 million were auto loans.
It depends on how you view its move into auto loans. If we have a recession, the bad loans on the books could rise considerably.
So, while the week from hell for UPST stock should have you much more cautious, the risk/reward proposition did get a lot better for aggressive investors.
It’s a buy under $30.
On the date of publication, Will Ashworth 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.