Upstart stock could lose more than half of its value as gains highlight the “perfect storm of headwinds.”

Upstart Holdings Inc. shares could lose more than half of their value in Tuesday’s session after the lender cut its full-year forecast amid macroeconomic momentum.

upstart’s camp UPST,
is down 56% in premarket trading on Tuesday after the company’s latest report and comment, in which Upstart’s management team acknowledged that lending volumes were likely to be less resilient than previously expected as rising interest rates mean that some would-be borrowers are no longer available for credit have been approved or the rates quoted are too high for their liking.

The report prompted blunt assessments from analysts, some of whom downgraded Upstart’s stock.

“Our thesis on Q1 2022 results showed that consumer credit has normalized,” wrote Peter Christiansen, an analyst at Citi Research, in a note to clients. “However, our expectation was that credit performance at recent issuance was reasonably expected and calibrated, and perhaps the performance benchmarks were too trend-adjusted against less suitable lagging conditions… we had overestimated these assumptions – lost the forest through the trees.”

Upstart uses artificial intelligence in its lending decisions, and Christiansen added that the company’s AI “appears to perform better in stable to supportive credit conditions, although it’s now apparent (compressed conversion) that the platform needs time to settle down.” adjust degrading macros”.

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

Piper Sandler’s Arvind Ramnani also downgraded the stock, lowering its rating from neutral to overweight and slashing its price target to $44 from $230.

Upstart is facing a “perfect storm of headwinds,” he wrote, as well as a widening “range of results,” given the macroeconomic climate.

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

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

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

He said most of the loans on the balance sheet are related to Upstart’s ramp-up of its newer auto loan product, while the rest is what Upstart’s management calls a “market-cleaning mechanism.” That means the company is using the loans “as a temporary stopgap measure to allow the platform to adjust to faster-moving market interest rates,” Christiansen wrote.

“Upstart views this as a variable feature of the business (will not be long-term or significant), although the company plans to improve its response time to market conditions,” he continued.

For Wedbush analyst David Chiaverini, Upstart’s recent report helped validate his bearish argument. He echoed Upstart’s disclosure that newer credit vintages aren’t doing as well as older ones, something he said was “consistent with that.” [his] Thesis on downgrading stocks to underperforming earlier this year” based on evidence from data he has collected and monitored.

Chiaverini also commented on the balance sheet loans.

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

However, JMP Securities analyst Andrew Boone remained bullish on Upstart.

“While we recognize the risk of worsening credit conditions, further rate hikes, and the fact that Upstart now has more debt on its balance sheet, we believe these factors are fully integrated into our model (we cut revenue by 11% in 2022 ) and valuation reassessed (shares are down 46% in after-hours trading) Estimates now appear conservative to us and we believe the numbers can move up from here,” he wrote.

Boone has an outperform rating on the stock despite lowering his price target to $70 from $245.

Upstart shares were down 27% in the three-month period ending Monday’s close, compared to an 11% decline in the S&P 500 SPX.
In the same period. Upstart stock could lose more than half of its value as gains highlight the “perfect storm of headwinds.”

Brian Lowry

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