{"id":359753,"date":"2025-11-06T12:18:33","date_gmt":"2025-11-06T12:18:33","guid":{"rendered":"https:\/\/www.europesays.com\/us\/359753\/"},"modified":"2025-11-06T12:18:33","modified_gmt":"2025-11-06T12:18:33","slug":"upstart-stock-drops-ai-model-overreacts-to-macro-signals","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/us\/359753\/","title":{"rendered":"Upstart stock drops, AI model &#8216;overreacts&#8217; to macro signals"},"content":{"rendered":"<ul class=\"rte2-style-ul\" style=\"margin-top: 0px; margin-bottom: 0px; padding-inline-start: 48px;\">\n<li><b>Key insight: <\/b>Upstart&#8217;s stock plummeted 14.8% not because of poor profits, but because its own AI model intentionally &#8220;tightened the credit box,&#8221; causing a miss on loan origination volume.<\/li>\n<li><b>Supporting data: <\/b>The company reported $2.9 billion in loan originations, falling significantly short of the $3.3 billion analyst consensus, even as consumer applications hit a three-year high.<\/li>\n<li><b>Expert quote: <\/b>CEO Dave Girouard called the model&#8217;s behavior a &#8220;speed bump&#8221; and admitted it was &#8220;overreacting,&#8221; but analysts from Jeffries found the company&#8217;s explanation &#8220;confusing.&#8221;<\/li>\n<\/ul>\n<p>Overview bullets generated by AI with editorial review<\/p>\n<p>Upstart, a lending marketplace powered by AI, saw its stock price decline 14.8% following its third-quarter earnings call Tuesday afternoon.<\/p>\n<p>Despite reporting strong profitability that beat analyst expectations, the market reacted negatively to disappointing loan origination volume and cautious guidance for the remainder of the year.<\/p>\n<p>Upstart shares, which closed at $46.24 on Tuesday, opened trading Wednesday at $39.38. Year-to-date, the company&#8217;s stock remains under pressure, down 35.7% since the beginning of 2025.<\/p>\n<p>Analysts noted that uncertainty surrounding the effectiveness of Upstart&#8217;s underwriting model and lower forward-looking expectations contributed to the stock&#8217;s performance.<\/p>\n<p>Despite the negativity, Upstart, which had been unprofitable for 12 straight quarters until <a href=\"https:\/\/www.americanbanker.com\/news\/upstart-returns-to-profitability-in-second-quarter\" class=\"Link\" target=\"_blank\" rel=\"noopener\">breaking the trend in August<\/a>, beat analyst expectations on a number of bottom-line metrics.<\/p>\n<p>The company had net income of $32 million, beating the analyst consensus of $10.2 million, according to estimates collected by S&amp;P Market Intelligence. The company had a net loss of $6.8 million in the same quarter last year.<\/p>\n<p>This net income also translated to a diluted earnings per share, or EPS, this quarter of $0.23, compared to the consensus of $0.08.<\/p>\n<p>&#8220;In Q3, we continued to execute on our 2025 game plan of rapid growth, profitability and AI leadership \u2014 all anchored in exceptional credit performance,&#8221; said Upstart CEO and founder Dave Girouard.<\/p>\n<p>Loan originations slowed<\/p>\n<p>The headline miss that concerned investors was in loan origination volume. Upstart had approximately $2.9 billion in originations on the quarter, falling below the consensus expectation of $3.3 billion, according to Jefferies analysts.<\/p>\n<p>&#8220;3Q25 results show slowing momentum, driven by a more selective model,&#8221; read an analyst note from John Hecht, an equity analyst at Jefferies.<\/p>\n<p>Upstart&#8217;s signature AI models intentionally pulled back on lending activity because of mixed risk indicators, according to company leadership.<\/p>\n<p>Upstart&#8217;s chief technology officer Paul Gu said during the earnings call Tuesday that Upstart&#8217;s AI model sensed macroeconomic stresses during the summer, leading it to tighten the credit box.<\/p>\n<p>The model is designed to &#8220;respond with speed and precision to changes in macro conditions,&#8221; according to Gu. &#8220;A few months ago, that led the model to tighten on credit while certain risk signals were elevated before recently normalizing.&#8221;<\/p>\n<p>This behavior &#8220;partially reflects irreducible volatility in the outside world, but is also a function of our model design and sampling variance, both of which continue to improve,&#8221; Gu added.<\/p>\n<p>Hecht said in his analyst note that the company&#8217;s explanation for why the model shifted during the quarter &#8220;was confusing to us and is in contrast to the overall market.&#8221;<\/p>\n<p>This temporary conservatism resulted in a reduction in the company&#8217;s conversion rate from 23.9% in the previous quarter to 20.6% in Q3. The conversion rate reflects the number of loans approved, not their dollar value.<\/p>\n<p>Upstart&#8217;s AI model converted fewer loans despite consumer demand growing rapidly, evidenced by application submissions reaching the highest level in over three years.<\/p>\n<p>CEO Girouard acknowledged the model was &#8220;overreacting&#8221; and called the result a &#8220;speed bump.&#8221;<\/p>\n<p>&#8220;I think in some sense, having a model that overreacts is better than having ones that underreact because it did revert,&#8221; he told investors.<\/p>\n<p>Analysts skeptical of underlying performance<\/p>\n<p>David Scharf, managing director of equity research at Citizens Bank, said in an analyst note that the bumps &#8220;raise questions regarding how differentiated [Upstart&#8217;s] model is compared to other machine learning-based lenders.&#8221;<\/p>\n<p>Upstart has marketed its underwriting models as a differentiator, but the &#8220;bumps or misreads inject a dose of incremental uncertainty in the company&#8217;s ability to deliver industry-leading risk-adjusted yields to investors in its loans,&#8221; according to Scharf.<\/p>\n<p>Upstart&#8217;s revenue of $277 million \u2014 a 71% improvement year over year \u2014 slightly missed the analyst consensus of $280 million. Hecht represented the company&#8217;s third-quarter results as &#8220;largely weaker than consensus estimates.&#8221;<\/p>\n<p>Scharf said Citizens expects the third-quarter trends &#8220;to continue into next year and to see them incrementally lowering bottom-line performance.&#8221;<\/p>\n<p>As such, the bank slightly lowered its estimate for Upstart&#8217;s 2026 performance. Specifically, it changed its estimate for the company&#8217;s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) from $316 million to $313 million.<\/p>\n","protected":false},"excerpt":{"rendered":"Key insight: Upstart&#8217;s stock plummeted 14.8% not because of poor profits, but because its own AI model intentionally&hellip;\n","protected":false},"author":3,"featured_media":359754,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[21],"tags":[174974,691,738,13656,693,158,174973,67,132,68,76918],"class_list":{"0":"post-359753","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-artificial-intelligence","8":"tag-ab-technology","9":"tag-ai","10":"tag-artificial-intelligence","11":"tag-earnings","12":"tag-fintech","13":"tag-technology","14":"tag-u-s-fintech","15":"tag-united-states","16":"tag-unitedstates","17":"tag-us","18":"tag-yahoo-finance-feed"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@us\/115502717653935569","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/359753","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=359753"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/359753\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/359754"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=359753"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=359753"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=359753"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}