Consumer lending provider Upstart Holdings reported its first-quarter results yesterday after the bell. In the wake of that particular set of data, shares of the company are off 53% in early trading today.
What caused such a catastrophic crash? The company cut its revenue growth forecast for the year and said rising loan rates appear to be hurting demand for its product. Slowing growth this year, potentially slipping net income and a market in which interest rates are expected to rise even more have made Upstart an un-darling in investors’ eyes.
Upstart’s poor guidance isn’t just hurting its own shares. The value of Affirm’s stock also fell after Upstart’s results came out. After falling 17.5% during regular hours yesterday, shares of Affirm hit a 52-week low of $18.39 in early morning trading today. The company also suffered an analyst downgrade this morning.
Affirm’s stock recovered to a more modest 5% decline at the start of trading today, but it’s clear that investors are linking Upstart’s results to Affirm’s value, a reasonable move as both offer unsecured consumer credit even if their go-to-market motion is different.
The shocking decline in the value of the two companies is only part of the story. There are myriad startups in the BNPL market, meaning that a large piece of fintech was just heavily repriced. Startups pursuing a BNPL or similar consumer credit product now have a far lower present-day value, and their path to exit much steeper.
Market reaction aside, Upstart actually had a solid Q1. Let’s talk about the rest of the year, and just how worried we should be about BNPL startups looking ahead.
Upstart’s lackluster 2022 guidance
Briefly, Upstart said its revenue rose 156% to $310 million in the first quarter from a year earlier. But despite the rapid revenue growth, GAAP net income came in at $32.7 million, up from just over $10 million a year ago. The company beat analysts’ expectations for both revenue and profit.
Why, then, is the company seeing its value being halved? The following, via a Fool transcript of its earnings call (emphasis ours):
- CFO: “After remaining at historically low levels for the past 18 months, loan default rates rose quite abruptly toward the end of last year and are now back to, or in some cases, above pre-pandemic levels.”
- CFO: “Separately, interest rates have continued to climb in response to inflation signals and Fed tightening. The combination of inflation and monetary tightening imply the non-trivial risk of a recession potentially later this year. Given the general macro uncertainties and the emerging prospects of a recession later this year, we have deemed it prudent to reflect a higher degree of conservatism in our forward expectations.”
Upstart said on the earnings call that it expects “revenues of $295 million to $305 million” in Q2 2022, and full-year revenue of $1.25 billion, which is much lower than the previous $1.4 billion forecast. In the second quarter, profits are also set to fail the break-even test, with net income expected to come in at “negative $4 million to $0 million.”
Investors were not thrilled at the changes to the forecast. Here’s more from the call on the current situation:
- CEO: “We expect less volume than we would have a few months ago based on pricing in the marketplace being higher, and that’s a function of both underlying base rates being higher as well as the risk in the environment and the risk premium that either lenders or investors are demanding. So you put that all together, and it’s been an increase in sort of average rate to the consumer of several hundred basis points.”
Why do rising rates matter for Upstart’s business? Here’s the CEO again:
- “It’s really simple, as when the consumer rates go up, that means on the margin, a whole bunch of people that would have been approved are no longer approved. So there’s a whole bunch of just loans that never happened at all. And there’s a bunch of people that are still approved, but the interest rate is a few percentage points higher, and a certain fraction of them are going to decide that’s not the product that they want. They don’t need it.”
- “It’s — in many, many cases, it’s a discretionary loan where they’re buying something or paying off something that they don’t necessarily have to. So there’s a fair degree of price sensitivity. And just put those together — when average rates go up, you’re going to see less volume. When average rates go down, you’re going to see more volume.”
Summarizing all of that: After a period of seeing fewer delinquencies, the economics of Upstart’s business have reverted to what we might call baseline, which will affect the company’s profitability. Upstart is also anticipating slower revenue growth this year due to macro uncertainty and the impact of rising rates. Why? Because rising rates make Upstart’s loans more expensive, leading to lower volume.
That means Upstart is selling a product in an uphill market with worsening economics and a more difficult value proposition. The company also said it has “started to selectively use our capital as a funding buffer for core personal loans in periods of interest rate fluctuation,” which analysts did not find encouraging.
Is the BNPL boom over?
Yes, even if the fintech product category might survive. Why? Because the issues that Upstart discussed above are not going to go away — rates are going to rise more this year, leading to even more pain at the point of sale for BNPL providers. The BNPL boom was partially predicated on a short-term booster shot, it appears. To wit, here’s Upstart’s CFO from the same call:
- “As a way to keep investors abreast of such credit trends, we have introduced new information in our investor materials, which shows in aggregate for all historical vintages the in-period loan defaults compared to the aggregate defaults that were predicted across those vintages at the time of their origination. The drop and subsequent reversal in developed trend that is shown on the chart are in our view a function of the injection and subsequent waning of the government stimulus.”
Now that the effects of the stimulus are fading and low interests are a thing of the past, we’ll see which BNPL concerns can really offer a consumer point-of-sale loan that is attractive compared to other payment options.
Startups building BNPL products or similar services had a great run. A list of early-2022 BNPL funding rounds can be found here, for example. There’s hundreds of millions, if not billions, of capital invested into yet-private companies chasing a similar exit result as Upstart and Affirm. And now those targets have been roughly cut down, sharply limiting the value of their private-market comps.
For startups in the fintech category, this is the bad place.