By Sam Boughedda
Upstart Holdings (NASDAQ:UPST) was reiterated with an Underweight rating by Morgan Stanley analyst James Faucette, who cut the firm's price target to $15.50 per share from $19.
Despite the price target cut and Underweight rating, Upstart shares have gained more than 3% so far in Friday's session.
The analyst said in a note to investors that UPST's pre-announced 2Q22 results "leave us incrementally bearish on the run-rate of origination volumes into future quarters, which we think is emblematic of the cyclical headwinds impacting UPST's business."
"While management highlighted that approximately half of their downward adjustment to 2Q22 revenue expectations was due to negative impact from loan sales, we're most focused on the drag from contracting origination volumes," said the analyst. "UPST provided their 2Q22 outlook after 1Q22 earnings on May 9th – in the final ~7 weeks of the quarter, we think origination production shrank materially as ABS markets tightened and cyclical interest rate/delinquency pressures escalated."
Faucette also said they expect further volume contraction to negatively impact the stock.
"We maintain that origination performance is most important to the future trajectory of the business, and are convicted that volumes trending lower will be the primary driver of the stock. UPST's pre-announcement reinforced our view that the company's platform was a significant beneficiary of cyclical tailwinds in '21, and will subsequently face headwinds in '22, impacting both growth and valuation."
Morgan Stanley cut estimates for the company anticipating cyclical sensitivities. "With management's recently disclosed expectations surrounding 2Q22 performance, our '22/'23 origination expectations move lower to $13.7bn/$13.4bn, from $16.1bn/$18.1bn prior," said Faucette, adding that although their diluted EPS expectations move lower to -$0.21/$0.70, from $0.65/$1.22, they believe Upstart will demonstrate flexibility in protecting profitability on an ongoing basis.