Earlier this year, the artificial intelligence lender Upstart (UPST 2.21%) announced a $400 million share repurchase program. But in the first quarter of the year, which ended March 31, Upstart didn't repurchase any shares. Additionally, management made no mention of the program on its recent first-quarter earnings call. So, what happened to this share repurchase program? Is Upstart still planning to buy back stock? Let's take a look.
So, what's the deal?
Upstart formally announced the share repurchase program along with its fourth-quarter and full-year earnings report for 2021 on Feb. 18 of this year. It's a bit unusual for a company in high-growth mode like Upstart to conduct a share repurchase program so early, but CFO Sanjay Datta attributed the situation to two things: the company's profitability and "economic opportunism" in the sense that management believed shares were undervalued.
Around that time, Upstart traded around $130 per share. Toward the end of March, there were times the stock traded below $100, and very briefly below $90, so there were opportunities to buy back stock.
Image source: Getty Images.
But we know that during the quarter, Upstart was also dealing with several other issues that kept it busy. Upstart wants to be a tech company that helps investors, banks, and credit unions better assess the credit quality of borrowers so that they can originate loans and see lower loss rates. However, Upstart doesn't actually want to be a bank. It wants to see as many loans as possible originated with its software because it collects a fee for each origination.
Upstart has no intention of holding loans on its balance sheet for the long run because it's not capital efficient and would slow growth. But in the first quarter, the loans on its balance sheet shot up from about $252 million to about $598 million. Part of this is by design because Upstart recently began originating auto loans, which the company had previously said they were keeping on their balance sheet until they were tested more.
But a small portion of personal loans that typically would have been sold to investors was put on the balance sheet as well. As interest rates rose in Q1 and the economic environment became more uncertain, some investors who normally buy and fund the loans had to step back to determine how they should be pricing the risk, which led to a pause in funding. Upstart decided to balance sheet these loans to "bridge" the gap. It was a major reason the stock sold off intensely following earnings.
Not only is this a signal that the capital markets could be drying up for Upstart loans, but Upstart is also now on the hook for this credit risk if it goes bad. In addition, interest rates have kept rising since Q1 ended, so the situation in the capital markets may have worsened. Upstart may be retaining capital right now in case there are some loan losses or the situation intensifies and Upstart needs to step in again. Given the market's reaction, I imagine Upstart will want to get these loans off of its balance sheet as soon as possible.
Will Upstart buy back stock in the future?
Upstart's share repurchase program is still active, so the company could, in theory, buy back stock at any time. It might have bought back stock since the beginning of April. From a value perspective, there wouldn't be a better time to buy back stock than now, with shares trading about as low as they've ever been.
But I would be surprised to see Upstart buy back shares with so much turbulence in the market. I also never thought it was a good idea, to begin with. For one, Upstart may want to invest further in its product. Although management has been investing, they said part of the reason for the pause in funding in the capital markets is that the process for institutional investors adjusting their return thresholds for loans is still mostly manual, whereas Upstart's bank and credit union partners can adjust their return thresholds much more autonomously. Management said they plan to automate this further and make the system for the capital markets similar to that of partner banks.
But the point is that it seems like there is plenty to invest in, so I'm not sure the company would be sending the right message to the market by buying back stock. I think they should focus on getting the business back on track.
