Why Did Upstart Fall?

Investors who owned shares in Upstart made a lot of money in 2021. At the beginning of the year, shortly after Upstart’s IPO, shares traded for about $55. By October 15 of the same year, shares were priced at $390 each. That’s just shy of 610% growth. If you had invested $5,500 to buy 100 shares at the beginning of the year, your stock would have peaked at $39,000 by autumn.

And then Upstart shares started to fall even more rapidly than they had climbed. A month after the October peak, shares were trading for about $250. On the last day of 2021, they sold for $151. By the end of March 2022, the price had dropped all the way to $105. 

What could possibly make the company’s stock price fall so rapidly? Let’s take a closer look at why Upstart fell.

What Is Upstart and What Does It Do?

Upstart is a fintech company founded in 2009 to meet the needs of borrowers who didn’t meet traditional lending requirements. The company’s founders believed that FICO scores and income levels were insufficient risk assessors.

Upstart used those numbers, but it also considered factors like a person’s level of education, GPS, and work history. From this perspective, someone with a short credit history might not represent a significant risk when they also have a college degree and a high GPA.

It’s important to keep in mind that Upstart doesn’t lend money directly to borrowers. Instead, it provides an AI platform that assesses risk.

Someone who wants a personal loan might use Upstart to find a bank willing to lend them the money. This approach impressed some of the biggest names in tech and business. Early investments came from Mark Cuban, Google Ventures, and First Round Capital, among several others.

When the company went public at the end of 2020, many assumed that shares would become valuable quickly because no other platform offered such a sophisticated, automated way to pair lenders and borrowers. 

Why Upstart Stock Tumbled

With so many powerful investors backing Upstart, it seemed unlikely that the company would fail to meet expectations. 

When you look at Upstart’s revenues, it’s hard not to be impressed. In 2020, the company generated $233 million in revenue. That amount went up to $849 million in 2021. Contribution profits also more than tripled between 2020 ($105 million) and 2021 ($398 million).

Given what looks like excellent performance, why did Upstart stock take such a harsh tumble?

The source seems to be a study highlighting Upstart’s reliance on third-party funding. Although the company provides a useful service, it relies on banks and other lenders to generate revenue. The study asked a simple question that eroded much of the investors’ faith: What happens when geopolitical strife and global economic uncertainty make lenders more cautious?

If banks feel that lending money exposes them to too much risk, they will sharply decrease the number of loans they arrange. That would hurt banks in the short-term, but it could potentially ruin Upstart, which doesn’t have nearly as much financial clout as large banks.

A bank could potentially ride out a recession or depression. Upstart may be at a more severe disadvantage. Additionally, it seems likely that the U.S. government would come to the banking sector’s assistance before it devoted money to propping up a relatively small business like Upstart.

Can Upstart Find a Successful Way Forward?

Upstart has plans for short-term and long-term growth that could make it an attractive option to investors.

A big part of the plan relies on car loans. Upstart recently announced that it will join forces with Subaru to help consumers find vehicles within their price ranges. Shoppers will have the opportunity to identify what they want from their new vehicles and how much they want to pay.

The Certified Subaru Digital Tools Program and Upstart Auto Retail’s Build & Price product will assist consumers during a time when many manufacturers and dealerships expect inventory challenges.

Upstart expects this move to help it generate $1.5 billion in fiscal year 2022.

Is this enough to get Upstart stock back to $390? Probably not. But it does show that the company knows how to adapt to evolving needs.

This highlights more than an ability to partner with brands and earn more money. It could indicate that Upstart isn’t as affected by economic downturns as expected. If it can continue to prove this, shares might recover some or all of their lost value. It will take time, though, to win back the enthusiasm of Upstart’s early investors.

Is This an Opportunity To Buy Upstart at a Low Price?

It’s worth noting that Upstart’s earliest investors are still doing quite well. Those who bought shares in December of 2020 saw their investments double in value. It isn’t as robust a return as when Upstart shares sold for nearly $400 per share. Still, no one can rightfully complain about a 100%+ ROI.

Does that mean now is a good time to buy Upstart shares while the prices are relatively low?  Buying Upstart shares now isn’t necessarily a bad idea, but there is a good chance that the price will stay approximately where it is for another quarter until a catalyst arrives to spark a resurgence.

Future earnings reports could inspire more confidence. The company’s revenue growth has been impressive and there are good reasons for optimism: a large untapped market to go after still and international expansion are but two reasons.

However, if management fails to report rapid growth or highlights a slowdown in growth rates, expect a further exodus as any slowdown will likely be further punished by sellers exiting.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.