What happened
Shares of several consumer fintech companies fell today after the popular artificial intelligence lender Upstart (NASDAQ: UPST) disappointed the market with its latest earnings results and guidance.
Shares of buy now, pay later company Affirm (NASDAQ: AFRM) were trading nearly 16% lower as of 12:09 p.m. ET today, shares of the one-stop financial services company SoFi (NASDAQ: SOFI) were trading nearly 18.5% lower, and shares of the digital marketplace bank LendingClub (NYSE: LC) were trading about 9% lower.
So what
Last night, Upstart reported adjusted diluted earnings per share of $0.61 on total revenue of $310 million for the first quarter of 2021, both numbers that beat analyst estimates. However, Upstart also lowered its revenue guidance for the full year from $1.4 billion to $1.25 billion. The stock plummeted and as of this writing had fallen roughly 60%.
While the company increased its contribution margin guidance, it also lowered its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance for the full year. Additionally, Upstart earlier this year guided for $1.5 billion of auto loan originations in 2022, but now it seems that goal may be in question as well.
Over the past few months, the Federal Reserve has raised its benchmark overnight lending rate aggressively, by 0.75% in two meetings, sparking concerns among investors that it might tip the economy into a recession. Upstart is currently in the business of originating online personal and auto loans to a range of borrowers across the credit spectrum. These kinds of debt are often some of the first that consumers will stop paying down when they start to face financial pressure. Already, Upstart has seen default trends normalize as help from stimulus has gone away.
With all these concerns, Upstart's partners that actually fund and invest in Upstart loans have asked for higher returns, as there is now a higher likelihood that consumers will default in the future and as investors are facing their own higher funding costs. This has resulted in Upstart having to raise pricing on its platform for borrowers. Higher interest rates may also push out of qualification some borrowers who qualified for certain loans based on certain investors' risk appetite. All of this will result in lower loan transaction volume and lower conversion rates, which is how Upstart generates the large majority of its revenue.
Upstart also had to hold a small portion of loans that it normally sells to investors on its balance sheet in the first quarter, which spooked investors. That's because some of Upstart's investors, particularly those in the capital markets, are still determining what kind of risk they want to take on, which has resulted in a lack of funding for Upstart loans. Upstart's management has said this is temporary, but the company is supposed to act as a marketplace, and if funding in the capital markets dries up, that would be extremely problematic for future growth.
Now what
Affirm, SoFi, and LendingClub seem to be taking the hit because the market is clumping all these consumer fintech lenders together with Upstart. In Affirm's case, I can understand the concerns because the company is also somewhat beholden to the capital markets to fund and take on a large portion of its loans.
But I don't think LendingClub and SoFi deserve to be clumped in here because both now have bank charters. Bank charters give them access to cheaper deposits, which they can use to fund a large portion of their loans, making them much less reliant on the capital markets.
Additionally, while Upstart originates loans to borrowers all over the credit spectrum, LendingClub and SoFi lend more heavily to prime borrowers and above, who were less affected by stimulus funds and are in much better financial shape. SoFi will report earnings results for the first quarter of 2022 after the market closes today.
