Upstart (NASDAQ:UPST) stock has spiked over 49% so far in August. Further, it closed about 9.7% higher on Tuesday after Coatue Management revealed a stake in UPST stock. While UPST stock has recovered quite a lot, it is still down about 76% on a year-to-date basis. Further, its business faces multiple headwinds, which could stall the recovery in UPST stock.
Factors Hurting UPST’s Recovery
Upstart delivered weak Q2 financials due to funding constraints. Fears of an economic slowdown have led UPST’s lenders and institutional investors to pause or reduce their loan originations volume. Further, higher interest rates to counter inflation have led to increased loan pricing, higher funding costs, and delinquencies. This negatively impacted UPST’s revenue generation capabilities.
During the Q2 conference call, UPST’s CEO Dave Girouard stated, “we’re in a funding constrained environment,” which is the reason for the “revenue shortfall.” He added that lenders and institutional investors “have not left Upstart’s platform, but have temporarily paused or reduced their originations.”
To bridge the funding gap, UPST is leveraging its balance sheet. This comes as a concern as UPST mainly generates revenues from fees from banks or services with no credit exposure. The recent move will increase the credit risk for UPST.
In response to this shift, Atlantic Equities analyst Simon Clinch downgraded UPST stock to Sell from Hold. Further, citing near-term headwinds, Clinch lowered his revenue and earnings estimates for the next three years.
Is UPST a Buy, Sell, or Hold?
Upstart stock forecast on TipRanks shows that analysts are bearish about its prospects. It has received one Buy, five Hold, and six Sell recommendations for a Moderate Sell rating consensus. Further, analysts’ average price target of $26.64 implies 26.6% upside potential.
UPST stock also has negative indicators from hedge fund managers who have sold 7.3M UPST shares in the last three months. Further, 1.3% of TipRanks’ investors have lowered their exposure to UPST stock. Overall, UPST stock has an underperform Smart Score of 1 out of 10.
Bottom Line: UPST Stock May Remain Under Pressure
The ongoing headwinds, including funding constraints and higher loan pricing, could continue to hurt the loan volumes. These headwinds could hurt its revenue generation capabilities and restrict the recovery in UPST stock. Moreover, management’s decision to reduce the funding gap using its balance sheet is a concern. Also, analysts’ negative outlook and UPST’s low Smart Score indicate that it could remain pressured in the near term.
