Morgan Stanley nailed its coffin
Upstart's Capital Arrangements Might Be Promising But Concerns Around Annualized Losses Continue, Morgan Stanley Says
11:59 AM EDT, 08/08/2023 (MT Newswires) -- Upstart Holdings' (UPST) committed capital arrangements might work to diminish notional funding concerns but still lack clarity around their underlying economics, Morgan Stanley said in a note Monday.
Concerns around the rapid inflection in monthly annualized loss rates still remain, the analysts said, adding that they recommend investors fade what appears to be a low-quality rally.
The analysts said that while the sequential improvement in delinquencies from June to July is a slight positive, the rapid rise in delinquencies since H2 2022 has translated to record annualized loss rates -- July's stood at 23.9%, which represents 541 basis points of deterioration month-over-month and 1225 bps of deterioration year-over-year.
"We are concerned about the rapid inflection in monthly annualized loss rates, which should drive higher APR pricing and reduce borrower demand, especially in an environment where inflation is normalizing, and employment remains durable," the analysts said.
The analysts added that while several investors think that the purchase deal Castlelake struck with Upstart for up to $4 billion of loan purchases matches the two-year duration of Upstart, some lenders are pulling back.
The impact of the committed capital arrangements on Upstart's economics remains a key area of focus, the analysts said, adding that loss-sharing and/or modest take rate degradation remain the two most likely outcomes.
Morgan Stanley is maintaining its underweight rating on the stock with a $13 price target.
The company is set to report Q2 results on Tuesday after market close.
Price: 51.79, Change: -0.18, Percent Change: -0.35
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