The skyrocketing rally of Upstart Holdings Inc. (UPST) in 2023 has hit a snag due to persisting tough business conditions in the lending market. The stock, which relies on artificial intelligence for lending decisions, experienced a significant setback on Wednesday, with shares falling 24% in morning trading. Despite surging nearly 300% this year, the company indicated that it expects ongoing difficulties.
This decline marks the third-largest single-day percentage drop on record for Upstart and its worst performance since May 10, 2022, when it fell by 56.4%.
In light of the latest quarter’s results, Citi Research analyst Peter Christiansen expressed concern about Upstart’s heavy reliance on repeat borrowers and the funding challenges it faces. In order to support $800 million of funded principal in the second quarter, the company had to invest $40 million. These challenges, combined with the potential impact of rising interest rates, cumulative inflation, and the gradual return of student loan payments, lead Christiansen to maintain a sell rating and set a target price of $15 for the stock.
In a similar vein, Wedbush analyst David Chiaverini emphasized the need for Upstart to continue investing in order to secure funded principal.
Upstart’s Performance and Analyst Views
In the second quarter, Upstart co-invested $40 million, with the potential for it to be valued at $0 or up to $83 million based on credit performance. This investment is tied to $800 million of collateral, which suggests that Upstart needs to invest approximately 5% of the collateral amount as per the new long-term funding agreements. However, this could have a negative impact on the company’s economics depending on how loans perform.
There are concerns about the business model’s economics and credit quality, leading to a rating of underperform and a price target of $10 by Chiaverini.
On the other hand, Jefferies analyst John Hecht sees some positive signs in the latest numbers, such as improved funding dynamics, positive cash flows, and increased liquidity. Despite these positive indicators, Hecht remains cautious due to macro uncertainties and a valuation that is difficult to justify. He rates the stock as hold and lowers the price target to $46 from $60.
Piper Sandler’s Arvind Ramnani is looking for further supply-side improvements and acknowledges the company’s achievements in terms of margins, product enhancements, and automation. However, it is not clear whether Ramnani has made any changes to his rating or price target.
Currently, Upstart shares are trading at $37.90, which is significantly lower than their closing high of $390 in October 2021.