Upstart Holdings Inc. shares have tumbled 90% from their all-time highs, and BTIG analyst Lance Jessurun thinks now is the time for investors to buy in.
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"The bear thesis is fading, and the longer-term opportunity is materializing," he wrote Tuesday, while starting coverage of the financial-technology stock with a buy rating and $42 price target.
Upstart uses artificial intelligence to inform lending decisions, and its shares enjoyed a roaring rally in 2021 before crashing back to earth as rising interest rates dampened consumer demand for personal loans and macroeconomic turmoil made some funding partners jittery.
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"Our analysis on the last two years of Upstart has shown that they underestimated risk of the underlying loans (APRs weren't high enough), while the macro factor included in the model was not calibrated appropriately to the rising rates and credit challenges," Jessurun wrote.
But the company appears to be turning a corner, in his view, based on recent conversations with bank partners.
"Upstart seems to have adjusted well after a period of missing target cash flows, and credit now seems to be trending better than lending-partner expectations, and Upstart's reserve recommendations are trending very conservatively," he wrote.
The company recently struck a new funding arrangement that admittedly "may not have been at the most attractive terms," though Jessurun expects more favorable deals going forward.
"Now that this deal has been completed, we expect more deals will materialize in the near future with fewer incentives," he wrote. "Ultimately, while the funding partnerships will likely impact margins, we think this is the first step on a longer road to recovery."
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Meanwhile, lending partners seem to like the platform, with praise for the company's "clean fee and pricing structure, user-friendly setup, and ease of ability to adjust risk parameters up/down if needed."
His $42 price target reflects a 5.5-times multiple of enterprise value to sales, "a slight discount to peers, which we believe is warranted given lingering funding questions and overall balance sheet exposure." The target also implies that shares could move about 14% higher from Tuesday's close of $36.97.
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