The stock of Upstart dropped sharply on Tuesday after the artificial intelligence lending platform lowered its full-year revenue forecast, citing higher interest rates and an uncertain economy as reasons.
The company posted better-than-expected first-quarter results after the bell on Monday, but it also lowered its sales prediction for 2022 from $1.4 billion to $1.25 billion.
Upstart predicts revenue of $295 million to $305 million in the second quarter, while analysts polled by Refinitiv expected $335 million on average.
The stock fell 56.4 percent to $33.61 per share on Tuesday. Upstart is down 91.6 percent from its October high of $401.49 per share.
“Given the general macro uncertainties and the emerging prospect of a recession later this year, we have deemed it prudent to reflect a higher degree of conservatism in our forward expectations,” said CFO Sanjay Datta on Upstart’s earnings call Monday.
Increasing interest rates are affecting loan volume, according to the business, which employs artificial intelligence to assess creditworthiness.
“In addition to increasing rates for approved borrowers, this also has the effect of lowering approval rates for applicants on the margin,” said CEO David Girouard on the earnings call.
As the Federal Reserve continues to boost rates and shrink its balance sheet to combat persistent inflation, upstart management predicted more economic challenges ahead.
“Given the hawkish signals from the Fed, we anticipate prices will move even higher later this year, which will have the effect of reducing our transaction volume, all else being equal,” Girouard added.
Borrower defaults are also normalising, according to the company. During the pandemic, government help and stimulus measures lowered charge-off and delinquency rates to decades-low levels.
“After remaining at historically low levels for the past 18 months, loan default rates rose quite abruptly towards the end of last year, and are now back to or in some cases above pre-pandemic levels,” Datta said.
Following the quarterly report, Wall Street analysts at Goldman Sachs, Piper Sandler, Citigroup, and Stephens all downgraded Upstart.
On Tuesday, Piper Sandler analyst Arvind Ramnani downgraded the company from overweight to neutral and lowered his price objective from $230 to $44. The revised price forecast suggests a 75% drop from Upstart’s Monday closing price.
“The range of outcomes for UPST has increased, given macro uncertainties,” Ramnani said in the note. “We expect there could be further downside based on the speed and intensity of a recession.”
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