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Upstart Stock Loses Ground as Morgan Stanley Slashes Price Target
Stock Analysis & Ideas

Upstart Stock Loses Ground as Morgan Stanley Slashes Price Target

Story Highlights

It’s a bad environment for lenders right now, and Upstart Holdings is no different. Recent changes at the analyst level underscore the potential difficulties ahead for lenders like Upstart.

Lending operations like Upstart Holdings (UPST) face serious trouble in the market these days. Their primary product is about to be a lot less in demand than it was. Worse, their ability to profit from that product is even more threatened. Upstart lost 9.6% in pre-market trading today, and those losses held into the day’s trading session as well.

I remain bearish on Upstart Holdings. This is perhaps the worst environment possible for a lender. It’s not likely to get better in the near term. As attractively priced as it may be right now, it’s likely to see further reductions in price before things start looking brighter.

The last 12 months for Upstart Holdings started off with a magnificent run-up, but one that proved unsustainable. Upstart went from around $120 per share in early July to challenging $400 per share by mid-October. After that peak, however, came the fall, which has been continuing to this very day.

Meanwhile, the latest news at Upstart hasn’t been much help. James Faucette, an analyst with Morgan Stanley (MS), cut his rating on the company from “equal weight” to “underweight” and slashed his price target from $88 to $19 per share.

The reasoning is about what you’d expect: a combination of macroeconomic conditions and spiking interest rates will weigh heavily on any lender. That’s particularly true in Upstart’s case, which uses artificial intelligence to make its loans happen.

Wall Street’s Take

Turning to Wall Street, Upstart Holdings has a Hold consensus rating. That’s based on three Buys, seven Holds, and three Sells assigned in the past three months. The average Upstart Holdings price target of $44.62 implies 38.7% upside potential.

Analyst price targets range from a low of $15 per share to a high of $80 per share.

Investor Sentiment Seems Largely Unfazed

As bad as things are looking on the analyst front, you couldn’t tell things aren’t looking good from the investor sentiment metrics. Currently, Upstart has a Smart Score of 7 out of 10 on TipRanks, which puts it at the highest level of “neutral.” This makes it a little more likely to outperform the broader market than to underperform.

Hedge fund involvement is providing substantial support for the Smart Score’s thesis. Hedge funds added 2.4 million shares of Upstart Holdings stock in the most recent quarter. This represents the fourth straight increase, as hedge funds have added shares every quarter since March 2021.

Insider trading at Upstart is also lending a hand. Insiders bought $692,500 worth of Upstart stock in the last three months. However, looking back at the full year makes it clear that there’s plenty of selling going on. In the last 12 months, Sell transactions outweighed Buy transactions by 79 to 24.

As for retail investors who hold portfolios on TipRanks, the sentiment seems to be in decline. In the last seven days, portfolios that held Upstart stock fell 0.3%. In the last 30 days, 1.5% of portfolios cut their Upstart stock holdings. Upstart Holding’s dividend history is also not a factor, as it seems to be focused on growth. It succeeded at that for quite some time until the reversal of last October.

The Elephant in the Room is Shifting

The good part about Upstart Holdings stock right now is that the problems the stock faces are pretty clear and almost shockingly obvious. Upstart is a lender. It uses artificial intelligence to help make its decisions about whom to lend to, but in the end, it’s still a lender.

More importantly, it’s a lender about to go into likely recessionary conditions. That’s always a trigger for people to seek to borrow less money. Granted, this recession might be different from earlier ones.

Job security is still pretty brisk, with all the “help wanted” signs out pretty much everywhere. However, it’s a safe bet that some of those businesses will reconsider in light of current conditions.

That’s going to make the average person—especially one that’s seen a recession or two play out before—a little more gunshy about taking out loans for literally anything. It’s also going to make the current loans Upstart has on the books a little harder to collect.

Certainly, not every one of Upstart’s debtors will lose their jobs and thus be unable to pay back a loan. However, the likelihood that any one of them will see such circumstances increases under these conditions. In fact, it’s a safe bet that the artificial intelligence powering Upstart is already looking at potential borrowers much more critically as well.

Worse, since Upstart operates in the private sector, it needs investors to buy the loans from them. Investors will want better rates of return on riskier loans, and that in turn will likely cut revenue for Upstart as well.

So here’s the immediate picture for Upstart Holdings, and it’s likely to be the same picture for at least the next six months: potential debtors will pursue debt less strenuously, the debts that are currently issued have an increased likelihood of default, and those who actually do pursue loans are less likely to get them.

All of these points add up to a decline for Upstart. Analyst James Faucette is not alone here in his negative thoughts either. Yesterday, Upstart took another hit, this time from Wedbush’s David Chiaverini.

Chiaverini reiterated his “underperform” rating, noting that overall credit quality is faltering against the Kroll Bond Rating Agency (KBRA) benchmarks. That particular info nugget turns potential danger into currently-realized danger; getting payment on a loan is now less likely than it was.

Concluding Views

Right now, it’s probably a good idea to stay out of Upstart Holdings. It’s a lender going into a very challenging environment for lenders as a whole. Its loans face an increased risk of non-payment, and it may issue fewer loans as the company tightens up its lending practices to avoid further exposure to such risk.

It’s not all bad news, of course. Investor sentiment is on this company’s side for the most part. Share prices haven’t been this low since the IPO almost two years ago. Certainly, once the recession passes—as they generally do—Upstart will be in a position to make a comeback.

However, this company isn’t even trading down around its lowest price targets yet. It’s actually closer to the average than it is to the low. The high, of course, is pretty much unattainable for the time being.

That’s the biggest reason I’m bearish on Upstart Holdings. The low is likely yet to come for this company. Let it take another leg or two down before starting to consider this one for its likely post-recession surge.

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