Citizens downgrades Upstart on valuation concerns

Investing.com -- Citizens Financial Group downgraded shares of Upstart Holdings to Market Underperform from Market Perform and set a $20 price target, saying the stock’s valuation does not reflect peer comparisons and risks tied to its outlook.

Even after a 23% pullback since fourth-quarter results and a broader sell-off in fintech lenders with private credit exposure, Citizens said current levels remain difficult to justify relative to similar consumer lenders.

The company’s guide of three-year revenue CAGR outlook of 35% offers clearer visibility into its earnings potential at scale. This medium term outlook does not discount for any deterioration in consumer health or employment rates over the next 36 months.

It views Upstart less as a high-growth fintech and more as a cyclical consumer finance company, arguing the business should be assessed using traditional measures such as GAAP earnings, net income and book value.

The firm said this approach aligns with how investors evaluate peers including LendingClub and Pagaya Technologies, as well as, to a lesser extent, SoFi Technologies. It also pointed to digital lenders Enova International and OppFi as relevant comparisons.

Citizens said a focus on GAAP earnings is warranted given the company’s stock-based compensation levels and the fact that management does not provide net income guidance. The brokerage added that the confirmation that stock-based pay is not expected to slow reinforces its view that adjusted metrics are less useful for valuation.

The downgrade also reflects concern that Upstart’s medium-term loan origination outlook appears more aggressive than peers, which could add risk if growth falls short.

Citizens acknowledged several risks to its call, including the potential for a short-term rebound after the recent sell-off, high short interest that could trigger a squeeze, and stronger-than-expected progress in scaling new loan products and funding partnerships.

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