Morgan Stanley notes Upstart stock’s higher delinquencies amid lending profile challenges

Upstart Holdings (UPST) has experienced a stock decline exceeding 16% amid ongoing concerns regarding rising monthly loan delinquencies in its near-prime and subprime portfolio, with Morgan Stanley reporting August 30+ day delinquencies up 49 basis points month-over-month, though year-over-year delinquencies still show improvement. Despite BTIG highlighting an increase in 30-day delinquencies to 6.2% in August, JPMorgan upgraded UPST to Overweight, while the company simultaneously priced $600 million in 0% convertible senior notes due 2032 and partnered with ABNB Federal Credit Union to expand its AI-powered lending offerings.

Analysis

Upstart Holdings (UPST) presents a complex investment narrative, marked by a significant stock decline of over 16% in the past week amid conflicting credit performance signals and strategic developments. The primary headwind is deteriorating short-term asset quality, with Morgan Stanley reporting month-over-month increases in 30+ and 60+ day delinquencies of 49 and 41 basis points, respectively, for August. This trend is corroborated by BTIG, which noted 30-day delinquencies rose to 6.2%. However, these negative data points are partially offset by a substantial year-over-year decline in delinquencies (down 242 and 212 basis points, respectively) and evidence that recent loan vintages are outperforming those from 2022/2023, suggesting underwriting has improved. While the company is strategically shifting towards super-prime borrowers, which accounted for 26% of Q2 originations, Morgan Stanley cautions that its core identity remains a near- and subprime lender. This backdrop of credit uncertainty is met with divergent analyst views, as JPMorgan upgraded the stock to Overweight (with a reduced $88 price target), contrasting with more cautious observations. Simultaneously, Upstart has shored up its balance sheet by upsizing a convertible note offering to $600 million and continues to expand its AI-lending platform through a new partnership with ABNB Federal Credit Union.

Key Decisions for Investors

• Investors should closely monitor upcoming asset-backed security (ABS) performance data to determine if the month-over-month rise in delinquencies is a nascent negative trend or a temporary anomaly within the broader year-over-year improvement.
• The decision to hold or accumulate a position is contingent on conviction in the company's improved underwriting and strategic shift to super-prime, as supported by JPMorgan's upgrade, versus concerns over its continued exposure to a potentially weakening subprime consumer.
• Consider the dilutive potential of the new $600 million convertible notes, which have a conversion price of approximately $82.50 per share, against the benefit of enhanced liquidity for funding growth and navigating market uncertainty.
• Given the conflicting data and a recent 16% stock price decline, investors should anticipate continued high volatility and adjust position sizing to manage risk accordingly.