What happened to Upstart’s $400 million stock buyback program?
Earlier this year, the artificial intelligence lender Reached (UPST 16.32%) announced a $400 million share buyback program. But in the first quarter of the year, which ended March 31, Upstart did not buy back any shares. Additionally, management made no mention of the program in its recent first-quarter earnings call. So what happened to this stock buyback program? Is Upstart still planning to buy back shares? We’ll take a look.
So what’s the problem ?
Upstart officially announced the share buyback program along with its fourth quarter and full year earnings report for 2021 on February 18 this year. It’s a bit unusual for a fast-growing company like Upstart to conduct a share buyback program so soon, but CFO Sanjay Datta attributed the situation to two things: the company’s profitability and “opportunism economic” in the sense that management thought the stock was undervalued.
At that time, Upstart was trading around $130 per share. Towards the end of March, there were times when the stock traded below $100, and very briefly below $90, so there were opportunities to buy back shares.
But we do know that during the quarter, Upstart also faced several other issues that kept it busy. Upstart wants to be a technology company that helps investors, banks and credit unions better assess the credit quality of borrowers so they can initiate loans and see lower loss rates. However, Upstart doesn’t really want to be a bank. He wants to see as many loans as possible created with his software because he collects a fee for each set-up.
Upstart does not intend to keep loans on its long-term balance sheet as it is not capital efficient and would slow growth. But in the first quarter, loans on its balance sheet fell from about $252 million to about $598 million. Some of this is intentional, as Upstart recently started offering auto loans, which the company previously said they were keeping on their balance sheet until further testing.
But a small portion of the personal loans that would normally have been sold to investors have also been taken to the balance sheet. As interest rates rose in the first quarter and the economic environment became more uncertain, some investors who normally purchase and fund loans had to take a step back to consider how they should assess risk, which resulted in a funding hiatus. Upstart decided to book these loans to “fill in” the gap. This was one of the main reasons why the shares sold off intensely after the earnings.
Not only does this indicate that capital markets could dry up for Upstart loans, but Upstart is also now responsible for that credit risk should something go wrong. In addition, interest rates have steadily increased since the end of the first quarter, so the situation on the financial markets may have deteriorated. Upstart can retain capital at this time in case there are loan losses or the situation escalates and Upstart has to step in again. Given the market reaction, I imagine Upstart will want to get these loans off its balance sheet as soon as possible.
Will Upstart repurchase shares in the future?
Upstart’s share buyback program is still active, so the company could, in theory, repurchase shares at any time. He could have bought back shares since the beginning of April. From a value perspective, there would be no better time to buy back shares than now, with stocks trading about as low as they have ever been.
But I would be surprised to see Upstart buy back stocks with so much market turbulence. I also never thought it was a good idea, to begin with. On the one hand, Upstart may want to invest more in its product. Although management has invested, she said part of the reason for the pause in capital markets funding is that the process of adjusting loan yield thresholds by institutional investors is still mostly manual, while that Upstart’s banking and credit union partners can adjust their performance. thresholds in a much more autonomous way. Management said it plans to further automate this and make the capital markets system similar to that of partner banks.
But the thing is, it looks like there’s a lot to invest in, so I’m not sure the company would send the right message to the market by buying back shares. I think they should focus on getting the business back on track.