This A.I.-powered lending stock could be in trouble as macro environment worsens, JPMorgan warns

Published Tue, Apr 11 20237:01 AM EDT

Upstart shares will likely struggle as the environment for loans worsens, according to JPMorgan. Analyst Reginald Smith initiated coverage of the lending stock at underweight. His $11 price target implies the stock could tumble 36% over the next year from Monday's close. "We like the potential of UPST's AI lending platform, but our long-term bullishness is offset by near-term headwinds including slowing originations, waning investor demand for sub-prime unsecured consumer credit, and elevated losses on held loans," he said in a note to clients Tuesday. Shares slipped 1.8% in the premarket. But the stock is up almost 30% in 2023, which Smith called shocking. UPST YTD mountain Upstart Upstart has an artificial intelligence-driven, two-sided market place that is supposed to bring borrowers and lenders together to create expanded credit access, higher approval rates and lower interest rates compared with legacy underwriting models. Smith said AI is "ideal" for credit decisioning and expanding credit availability, and Upstart has the most robust AI-lending model within the firm's coverage universe after spending more than $440 million on engineering and product development in the past five years. Smith said the company benefited from pandemic stimulus driving lower default levels with other unsecured credit providers. The company reported record loan originations and profits in 2021. But the company could see challenges ahead with as more people default on loans, the demand for unsecured loans cools and losses on the company's held-for-investment loan portfolio rise. While Smith said he likes the long-term potential of the platform, he said it is currently too cyclical and sensitive to funding partners. Smith recommended investors avoid buying shares until macro indicators like the company's Upstart Macro Index improve or management announces an expanded loan funding strategy. "UPST is arguably the most macro-sensitive company in our coverage universe given its mix of sub and near-prime loans and reliance on at-will partner funding, which has dried up in recent quarters, crimping originations and forcing the company to hold more loans on its own balance sheet," he said. "We believe the annualized loss rate on held loans could be as high as 20%." — CNBC's Michael Bloom contributed to this report.