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Why Shares of Upstart Fell Today

What happened

Shares of Upstart Holdings (NASDAQ: UPST), a lender that uses artificial intelligence (AI) to make loan decisions, fell nearly 13.4% today after an analyst lowered his price target on the stock.

So what

Wedbush analyst David Chiaverini maintained his neutral rating on Upstart, but significantly lowered his price target from $160 to $110. The stock currently trades at $92.60.

In his research note, Chiaverini wrote: "We believe UPST's valuation is appropriately reflected in its current relative valuation. Even though the stock has pulled back over the last few months, valuation metrics including [enterprise value to sales] and price/sales are still well above peer levels."

Image source: Getty Images.

He added, "We believe a premium valuation is warranted given the company's high growth, but a widening premium is difficult to justify until we see that the recent spike in delinquencies is temporary."

The mention of rising delinquencies is certainly surprising to hear right now because most of the big banks have been reporting very strong loan quality in their credit card portfolios on recent earnings calls. If this does prove to be a longer-term trend, I think it would be very bad for Upstart, which has basically said it wants to replace Fair Isaac Corporation (FICO) credit scoring with its credit underwriting models.

Now what

This is the first I am hearing about the rising delinquencies, so I will need to investigate more and see what is said on the upcoming earnings report before making a determination.

But again, if this trend in rising delinquencies is true, it would not be good for the stock. Upstart has claimed its AI credit underwriting models can better assess the true credit quality of the borrower, which enables it to effectively approve and underwrite loans for borrowers who a bank or credit union normally wouldn't serve.

While Upstart's valuation has gotten more attractive, I certainly won't be buying this stock right now with the credit question up in the air.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns and recommends Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.


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