What happened
Shares of the artificial intelligence loan originator Upstart (UPST -1.97%) traded nearly 6.5% lower as of 12:51 p.m. ET today along with the broader market, but also after an analyst issued a bearish rating for the stock yesterday.
So what
Wedbush analyst David Chiaverini reiterated his underperform rating on the stock as data for Upstart loans that have been securitized continues to show deterioration. The Kroll Bond Rating Agency (KBRA) regularly provides updates on how the credit quality of Upstart loans that were packaged into asset-backed securities (ABS) and pass-through trusts are faring.
Chiaverini noted that the data shows that credit quality is performing worse than the KBRA's base case projections, which could have broader implications on the business.
Upstart is not a bank and therefore relies largely on outside funding and investors to purchase its loans. But if credit quality gets worse, investors are likely going to demand higher returns for loans they take on their own balance sheet or if they invest in the ABS. There could also be less demand in general for Upstart-originated loans.
If investors want higher returns to account for the risk, then Upstart has to raise loan pricing on its platform, which will slow origination volume on the platform. Considering Upstart collects fees for every loan originated through its platform, this could further slow revenue for the company.
Now what
Upstart's stock is down close to 75% this year, making the valuation look like a much better entry point. However, I still have reservations about the stock. For one, the economy could soon find itself in a recession, which could lead to more loan defaults.
Additionally, interest rates are expected to keep rising this year, which could have investors requesting higher returns in order to fund originations and put pressure on overall origination volume.
