Shares of Upstart Holdings (NASDAQ: UPST) have fallen more than 91% from the 52-week high. A confluence of negative factors, including fear of recession, high inflation, and rising interest rates, is why UPST stock lost substantial value.
Meanwhile, its increased cost of funding, higher loan pricing, and rise in delinquencies remain a drag.
It’s worth mentioning that most of the loans issued on its platform are taken up by large institutional investors in the form of credit-based instruments and sent to the ABS (asset-backed securities) market. Thus, credit tightening is not good news for UPST.
During the last quarter’s conference call, Upstart’s CFO, Sanjay Datta, stated, “the ABS markets in 2021 were historically constructive. So you could make a very healthy gain by purchasing a loan and selling it into the ABS world. And so a lot of that activity happened. That opportunity, as rates have tightened and this cost of funding has gone up, is far less today. And so the amount of product getting sent to the ABS markets is a lot less in 2022 than it was in 2021.”
In terms of loan pricing, Upstart mentioned that its average loan pricing has increased by about 300 basis points since October 2021. Further, the company expects it to rise higher given the Fed’s hawkish stance.
Overall, higher funding costs and an increase in loan pricing would impact loan originations and volume for Upstart. Meanwhile, higher delinquencies put downward pressure on UPST.
Now What?
Despite the massive drop in UPST stock, Wedbush analyst David Chiaverini retains his bearish stance. Further, his price target of $15 implies over 56% downside from current levels.
Chiaverini’s bearish stance is based on “weakening delinquency/loss trends on late-2021 loan vintages,” “higher risk premiums demanded by credit buyers and the ABS market,” and an increase in “loan pricing” that would impact borrowers and lead to lower conversion and slow origination volumes.
Bottom Line
Upstart benefits from higher transaction volumes, growth in average loan size, and expansion into the auto loans segment. However, the macro headwinds impacting origination volumes, the slowdown in the ABS market, and concerns about higher delinquencies could play spoilsport in the near future.
Wall Street analysts remain sidelined on UPST stock due to the short-term challenges. UPST stock sports a Hold consensus rating, based on three Buy, eight Hold, and two Sell recommendations. Further, the average Upstart price target of $49.92 implies 45.7% upside potential to current levels. Overall, UPST stock has a Neutral Smart Score of 4 out of 10.
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