Shares of Upstart Holdings Inc. fell more than 11% in premarket trading Tuesday as analysts digested the loan company’s new reality.
While leaders in Upstart UPST,
defended the performance of its artificial intelligence lending model in a conference call Monday afternoon, pointing to funding challenges as some banking partners pull back amid the uncertain macroeconomic landscape.
Upstart is an artificial intelligence-based lending platform that works with banks and credit unions to provide consumer loans by using non-traditional variables, such as education and employment, to predict creditworthiness.
See more: Upstart stock falls after earnings, but CEO says he’s ‘confident’ in value of AI lending
CEO Dave Girouard said on the call that Upstart’s team recognizes a need to “upgrade and improve the funding side of our marketplace, bringing a significant amount of committed capital on board from partners who invest consistently through cycles.” Furthermore, he shared that while the company does not intend to “become a big balance sheet lender whatsoever,” he sees the company turning to its own balance sheet at times as part of a “transitional phase.”
Analysts seemed to understand why Upstart executives might do this, but some had questions about what it would mean for the company and the stock.
“UPST indicated that it may expand its balance sheet opportunistically, if funding remains challenged,” Piper Sandler analyst Arvind Ramnani wrote in a note to clients. “This is the third change in balance sheet usage, which further expands the range of strategic decisions and financial outcomes.”
Ramnani acknowledged that he “[appreciates] Upstart’s desire to remain nimble,” but said the balance sheet activity “potentially increases the risk profile of the company.”
“Given these dynamics and a constrained funding environment, we believe UPST offers limited upside until visibility improves and the company delivers a consistent earnings frequency,” he continued.
Ramnani rates the stock neutral, while cutting his price target to $24 from $25.
Barclays analyst Ramsey El-Assal was also involved in the balance sheet movements.
“While it is certainly understandable that UPST will use all debt financing resources at its disposal (ie including its balance sheet) to bridge the challenging macro environment, we recognize that for some investors, this pushes the story more in the direction of a traditional lender versus a fintech company,” he wrote.
El-Assal noted that Upstart’s stock fell more than 50% after the company’s first-quarter earnings report, a drop he saw as “partially driven by UPST doubling the amount of loans on its balance sheet (versus 4Q21) in an effort to maintain marketplace volumes through an earlier dislocation of loan demand.”
More on Upstart’s balance sheet strategy: Upstart stock continues as more downgrades roll in
That said, he also saw some positives in Upstart’s latest quarter, including momentum with the company’s newer auto loan product and evidence of Upstart’s pricing power.
The upstart’s “early successes in auto loans can be seen in larger average loan sizes, implying greater diversification in product offerings,” El-Assal wrote.
In addition, Upstart’s CFO noted “that while the company normally prices loans at a lower level to drive more volumes on the platform, given the platform’s existing demand constraints, UPST has the flexibility to raise prices to better monetize current loan volumes,” according to El- Asshole. “These higher admission rates are more focused oncash generation‘ and create one more ‘resilient P&L in the quarter.'”
He rates the stock at equal weight with a price target of $25.
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Beyond looking at Upstart’s plans around balance sheet lending, Wedbush’s David Chiaverini noted that Upstart plans to bring more committed capital on board from long-term investors, though this isn’t necessarily an easy fix, in his view.
Chiaverini wrote that “it will take some time for this to materialize and we believe that committed capital agreements may result in material financial costs to put in place.” He has an underperform rating and a $15 price target on the shares.
The upstart’s stock has lost 58% over the past three months, through Monday’s close, as the S&P 500 SPX,
has added 3.7%.
