Upstart's Stock Soars. Here Are the Reasons Analysts Say the Tide is Turning.

After facing a challenging period, Upstart Holdings Inc. seems to be regaining momentum, and Wall Street is paying close attention. The artificial intelligence (AI)-driven lending company, which experienced a major surge in popularity in late 2021, saw its stock hit highs of around $390, fueled by strong demand for its personal loan offerings. However, the stock later plummeted as high interest rates and funding difficulties led to reduced loan volumes.

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Currently, Upstart’s stock remains well below its peak, closing at $55.47 on Thursday. A 17% surge in Friday’s premarket trading indicated a price of $65.27, underscoring how far the stock is from its earlier highs. Despite this gap, investor and analyst sentiment has recently turned more positive.

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“After a significant shift in sentiment during the second quarter, the outlook continues to improve in the third quarter,” wrote Mizuho analyst Dan Dolev following Upstart’s earnings release on Thursday afternoon. According to Dolev, the report highlighted multiple favorable factors. Upstart achieved a sequential increase in loan volumes of 43% and provided optimistic guidance for the next quarter.

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Dolev noted that this positive outlook aligns with an encouraging view of Upstart's AI models and the prospect of a more stable interest rate environment, as well as potential support from a Trump administration that may favor business. He also found Upstart’s comments on the economic environment particularly noteworthy.

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“It was interesting to hear management mention that ‘Americans entered 2024 with an increase in disposable income, offering some support for sustained spending levels and providing some relief through higher savings rates,’” Dolev wrote. “This outcome exceeded our expectations.” In light of these insights, Dolev raised his target price for Upstart’s stock from $48 to $90 while maintaining an “outperform” rating.

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Adding to the optimism, Piper Sandler’s Arvind Ramnani upgraded his rating on Upstart’s stock to “overweight” from “neutral.” Ramnani highlighted that the company is benefiting from a more favorable interest-rate environment, improving lending conditions, and enhancements to its lending model. He added, “Notably, the third-quarter performance was driven by improvements to Upstart’s lending model, along with support from the lower interest rates.” Ramnani is particularly encouraged by Upstart’s financing dynamics, which now include a collaboration with Blue Owl. “Upstart currently has more than half of its loan funding from committed capital, which we believe adds stability to its business model,” he explained, raising his target price from $31 to $85.

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Similarly, Needham analyst Kyle Peterson observed that Upstart’s position seems to be improving as interest rates decline and credit quality remains stable. Nonetheless, Peterson expressed caution about the stock’s immediate prospects. “After the approximately 20% surge in after-hours trading, we’re taking a wait-and-see approach and looking for a more favorable entry point,” he said, assigning a “hold” rating to the stock.

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Upstart’s recent resurgence is notable given the market's volatile reaction to rising interest rates over the past couple of years. As an AI-based lending platform, Upstart aims to revolutionize the credit approval process by using machine learning to assess potential borrowers. Although it initially attracted significant investor attention, the company faced a rough patch when funding partners scaled back their involvement amid higher rates, causing a slowdown in lending volume.

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Recent changes in the market landscape have allowed Upstart to recover, driven by improvements in its AI models, which have shown promising results in underwriting accuracy. The company’s latest quarterly performance appears to reflect these advancements, along with some relief in the broader interest-rate environment. These developments have revived interest in Upstart’s stock among investors, with several analysts revising their expectations upwards in light of its improved fundamentals.

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One significant factor contributing to the renewed investor optimism is Upstart’s increased access to committed capital. By securing funding partnerships like the one with Blue Owl, Upstart has stabilized its business model. This shift has helped mitigate one of the key risks that had affected the company’s performance over the past couple of years, adding predictability to its loan financing process. The committed capital model allows Upstart to expand its loan offerings while reducing its reliance on fluctuating market conditions for funding availability.

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Despite the positive momentum, some analysts are still taking a cautious stance. For instance, Needham’s Peterson, while acknowledging the improvements, prefers to wait for a more attractive entry point into the stock, given its recent surge. This cautious approach highlights that while Upstart is making progress, it has yet to fully overcome all of its challenges.

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In sum, Upstart Holdings appears to be on an upward trajectory once more, supported by a more favorable macroeconomic environment, enhancements to its AI lending model, and strengthened funding stability. Wall Street’s renewed interest reflects a cautious optimism about the company’s potential to regain its former standing in the market, though the journey may still have hurdles ahead. As Upstart continues to adapt and strengthen its position, it remains a company to watch in the AI-powered lending space.

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