Shares of Upstart Holdings (NASDAQ: UPST) have tanked 70% year-to-date, with a significant decline triggered by the company’s weak guidance.
Upstart is a lending platform that uses artificial intelligence to gauge the creditworthiness of a customer and partners with banks and credit unions to expand access to affordable credit.
Dismal Outlook
Last month, Upstart announced robust Q1’22 results that surpassed analysts’ expectations. It’s worth noting that transaction volume, which indicates loans originated on the company’s platform, grew 174% year-over-year to $4.5 billion in Q1. However, the stock slumped 56% on a single day following the results as investors were disappointed with Upstart’s Q2’22 outlook and downward revision to its full-year guidance.
Upstart expects full-year revenue of about $1.25 billion, which reflects a 47% growth rate, down from its previous outlook of $1.4 billion. The company cited an uncertain macro backdrop and “the emerging prospects of a recession later this year” as the reasons for a cautious outlook.
Investors were also concerned that loans, notes, and residuals on Upstart’s balance sheet at the end of Q1’22 increased significantly to $604 million from $261 million at the end of Q4’21.
Wall Street’s Take
Following Upstart’s announcement of a poor outlook, several analysts lowered their ratings and slashed their price targets, including Stephens analyst Vincent Caintic.
Caintic downgraded Upstart stock to Sell from Hold and dramatically cut his price target to $28 from $124. Caintic pointed out that Upstart has originated loans on its balance sheets that it wasn’t been able to transfer to its funding partners. This, he feels breaks the thesis “of a marketplace lender, which is supposed to originate on the behalf of funding partners.”
Further, Piper Sandler analyst Arvind Ramnani downgraded his rating to a Hold from a Buy and significantly slashed his price target to $44 from $230. Ramnani feels that Upstart is facing “a perfect storm of headwinds,” including higher loan rates, larger loan balance, and a looming risk of recession or increased rise in delinquencies.
Overall, the Street is sidelined on the stock, with a Hold consensus rating based on three Buys, eight Holds, and two Sells. At $49.92, the average Upstart price target implies upside potential of 8.29% from current levels.
Conclusion
Rising interest rates might impact lending activity, thus hurting Upstart’s business. The company’s business model, its expansion into attractive growth areas like auto lending, and long-term opportunity seem attractive.
However, the majority of Wall Street analysts covering Upstart are sidelined on the stock due to the impact of macro-headwinds and a looming recession on near-term performance.
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