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The Ratings Game: Upstart stock set to shed more than half its value as earnings highlight ‘perfect storm of headwinds’


Shares of Upstart Holdings Inc. could lose more than half their value in Tuesday’s session after the lending company reduced its full-year forecast in the face of macroeconomic dynamics.

Upstart’s stock

is down 56% in premarket trading Tuesday following the company’s latest report and commentary, in which Upstart’s management team acknowledged that loan volume was likely to be less robust than previously anticipated as the rise in interest rates means that some would-be borrowers are no longer approved for loans or are quoted rates too high for their liking.

The report prompted blunt takes from analysts, several of whom downgraded Upstart’s stock.

“Our thesis going into 1Q’22 results recognized that consumer credit has been normalizing,” Citi Research analyst Peter Christiansen wrote in a note to clients. “Yet our expectation was that loan performance on recent issuance was somewhat expected, calibrated for, and perhaps performance benchmarks had been overly trend-fitted vs. less suitable trailing conditions…we had overestimated these assumptions – losing the forest through the trees.”

Upstart uses artificial intelligence in its lending decisions, and Christiansen added that the company’s AI “seems to outperform in stable-to-benign credit conditions, though it’s evident now (compressed conversion) the platform takes time to adjust to deteriorating macro.”

He lowered his rating to neutral from buy, while slashing his price target to $50 from $180.

Piper Sandler’s Arvind Ramnani downgraded the stock as well, lowering his rating to overweight from neutral and dramatically reducing his price target to $44 from $230.

Upstart faces a “perfect storm of headwinds,” he wrote, as well as an increasing “range of outcomes” given the macroeconomic climate.

Ramnani noted that the company is using its own balance sheet to absorb more loan demand.

“Despite a growing network of bank partners and investors, Upstart has increased its loan exposure from $261M in Q4 to $604M in Q1, primarily for auto lending and new segments of personal lending,” he wrote. “While UPST continues to have a fee-based revenue model, the larger loan balance does increase its risk exposure.”

Citi’s Christiansen also weighed in on the balance-sheet move, writing that it “raises an eyebrow.”

He said that most of the loans on the balance sheet are related to Upstart’s ramp of its newer auto-lending product, while the remainder are what Upstart’s management described as a “market clearing mechanism.” This means the company is using the loans “as a temporary stop-gap measure in order for the platform to adjust to faster moving market rates,” Christiansen wrote.

“Upstart sees this as a variable feature of the business (won’t be long-term or sizeable), though the company has plans to improve its response time to market conditions,” he continued.

For Wedbush analyst David Chiaverini, Upstart’s latest report helped validate his bearish case. He keyed in on Upstart’s disclosure that newer loan vintages weren’t performing as strongly as older ones, something he said was “in line with [his] thesis for downgrading the shares to underperform earlier this year” based on indications from data he collected and observed.

Chiaverini commented on the balance-sheet loans as well.

“While the company claims that its decision to keep more loans on-balance sheet was used as a market-clearing mechanism due to interest rate moves, we see this as a divergence from its capital-light business model and could indicate UPST has few alternatives other than to hold more loans due to funding issues,” he wrote, while keeping his underperform rating and halving his price target, to $35.

JMP Securities analyst Andrew Boone, however, stayed bullish on Upstart.

“While we acknowledge the risk around credit conditions worsening, further rate increases, and Upstart now holding more loans on its balance sheet, we believe these factors are fully incorporated into our model (we lowered 2022 revenue by 11%), and with valuation reset (shares are down 46% in after-hours trading) estimates now look conservative to us and we believe numbers can begin to move higher from here,” he wrote.

Boone has an outperform rating on the shares, though he cut his price target to $70 from $245.

Upstart shares had fallen 27% in a three-month span through Monday’s close, compared with a 11% drop for the S&P 500

over the same period.

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