Rising interest rates and loss expectations a drag on Upstart Holdings

© Reuters.

By Sam Boughedda

Looking ahead to Upstart Holdings' (NASDAQ:UPST) upcoming earnings release, Morgan Stanley analysts cut the firm's price target on the stock, albeit by $0.50 to $11 per share.

The analysts maintained an Underweight rating on Upstart, saying in a research note that they remain cautious as credit performance deteriorates and capital supply stays tight, "hampering UPST's growth and profitability outlook."

Upstart shares are down almost 6% Wednesday.

"Over recent months, investors have been highly focused on the pace of DQ normalization and the resulting impacts on credit performance. Not only have DQs moved rapidly higher since summer '22, but we're now seeing annualized loss rates start to reflect a worsening performance environment," wrote the analysts. "Jan. '23 weighted average annualized loss rates at 21.0% are ~1100bps higher than Aug. '22 levels (~9.9%), representing relatively balanced performance deterioration across deals."

They argued that these loss rates should drag significantly on yield to end investors and subsequently challenge UPST's value proposition.

They also stated that if the losses continue to move higher as the economy tightens, there could be "meaningful ramifications including impairment of capital and a necessity for rapidly increased APR pricing, which could reduce borrower demand."

"We think rising interest rates and loss expectations may be a drag on UPST's ability to source third party funding and support origination production, although some volume challenges may be attributable to borrower weakness," the analysts added.