I pity the investor who bought Assets received (NASDAQ:UPST) Monday. Trading at $77, the company reported terrible earnings that sent UPST shares off a cliff. Upstart’s stock price fell 56% in one day, reducing its market capitalization to $2.8 billion.
In the scheme of things, reduce your annual income by 11% is not a big deal. There were plenty of companies to revise down and come out on top by the end of the fiscal year. Upstart could easily do the same. And, it reported a 224% higher net profit than in the first quarter of 2021.
However, like the Titanic, something potentially dangerous lurks beneath the surface.
I’m talking about the state of his lending business. InvestorPlace Ian Bezek recently discussed balance sheet loans. IIt’s important to remember that Upstart is a platform that enables banks to issue more and better loans through the use of artificial intelligence to assess credit risk – skyrocketed in the first quarter to reach $604.4 million, compared to $252 million at the end of December.
Bezek referenced CNBC Jim Cramer, who asked CEO Dave Girouard about all the “bad loans” on his balance sheet. The CEO’s response was less than convincing.
As I said in late April, if the company’s first quarter 2022 earnings report wasn’t singing, UPST stock was descent.
“A recession could be around the corner. If he takes more borrowers with low FICO scores and they turn out to be duds, the UPST stock won’t be $70; it will be half or worse. Mark May 9 on your calendars. It could make the difference,” I wrote on April 28.
According to his 10-Q, the fair value of Upstart’s loans on its balance sheet has increased 10 times from the first quarter of 2021. That’s a massive increase. One way to know the level of loans has gone up: The collection agency fees it paid in the first quarter for loans 30 days or more past due was $1.99 million, more than double the first quarter of 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, only $286,000 was more than 90 days past due. And of the $598 million, $231 million was auto loans.
It depends on how you envision moving to auto loans. If we have a recession, bad debts on the books could increase significantly.
So while the hellish week for UPST stocks should make you much more cautious, the risk/reward proposition has improved a lot for aggressive investors.
It’s a buy under $30.
As of the date of publication, Will Ashworth had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.