JMP cuts consumer loan company Upstart, saying earnings are too hard to predict
On Friday, JMP Securities downgraded shares of Upstart Holdings after the consumer finance company issued a profit warning highlighting how difficult it would be to predict its future earnings. Analysts led by Andrew Boone downgraded Upstart to market performance relative to market outperformance, but did not set a price target for the stock. Upstart shares were down nearly 16% in premarket trading on Friday. The stock has fallen more than 77% since the start of the year. Late Thursday, the company said it expected second-quarter revenue to be around $228 million, 24% lower than its previous forecast, due to a decision to sell loans at a loss on its balance sheet. Second-quarter net income is expected to be $27 million lower than the company had previously expected. “Upstart is impacted by a tighter funding environment as capital market participants wary amid recession concerns, while it has sold previously issued loans held on its balance sheet for losses given rising rates,” Boone wrote. Boone said Upstart deciding not to keep the loans on its balance sheet when capital market players are unwilling to fund the mounts results in “limited revenue visibility” and downgrading of the company. With high inflation and rising interest rates, capital market players are tightening lending requirements and limiting Upstart funding. While Boone sees this as a near-term headwind, fears of a recession create additional downside risks for the company, as JMP expects only 25-30% of Q1 issues to be held. by the banks. “To be clear, lending continues to perform roughly in line with expectations while Upstart has a significant catalyst ahead of it in automotive,” Boone wrote. “However, given the deteriorating macro environment and limited visibility on when financial markets will reopen for Upstart, we believe the risk/reward ratio in equities is balanced at current levels.” Granted, Upstart has improved its unit’s economics this year by buying back stock, Boone said. The company is also committed to maintaining positive free cash flow and has approximately $800 million of unrestricted cash on its balance sheet. The company’s loans are now performing roughly in line with expectations and aiming for returns of 10% or more. Fix: Upstart shares were down in premarket trading on Friday. An earlier version incorrectly indicated the day.
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