This Analyst Downgrades Upstart But Says SoFi Tech Could Become 'American Express' Of Fintech

JP Morgan analyst Reginald L. Smith noted that 2024 was a tale of two halves for fintech stocks. After a lagging start to the year, the aggregate market cap of the analyst’s fintech coverage universe has increased more than $65 billion since mid-September, fueled by cheerful calendar third-quarter 2024 results and management commentary, two rate cuts, and the U.S. Presidential Election.  

In fiscal 2025, lower benchmark rates and an improved third-party funding environment should spur increased loan origination volume and healthier gain-on-sale (GOS) margins for fintech lenders.

However, Smith remains cautious about fintech lenders at current levels and noted investors will find a more attractive entry point following the calendar fourth-quarter earnings cycle.

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Smith downgraded Upstart Holdings Inc UPST from Neutral to Underweight and raised the price target from $45 to $57.

Upstart Holdings benefits from a powerful flywheel effect that creates a virtuous cycle whereby more excellent repayment data leads to improved risk and fraud detection, which leads to higher approval rates and increased volume.

Smith noted the potential of Upstart Holdings’ AI lending platform, especially in light of an improving consumer credit and loan funding environment, and is encouraged by the company’s increasingly durable capital base, but continues to struggle with valuation and noted shares are pricing in a snap-back to fiscal 2022-level of originations, which is at least a few quarters away.

The price target boost reflects improving funding conditions and stabilizing credit trends. The price target applies a ~5.5x multiple to Smith’s calendar year 2026 revenue estimate, a slight premium to its TTM P/S ratio, which he noted as fair given rates remain relatively high, and Upstart’s own UMI suggests the macro environment is causing default rates to be above 40% above historical levels.

The rerating reflects Upstart Holdings’ ~$13 billion annualized origination volume the last time the stock traded in the high $70 range. Smith projected a fourth quarter of $180 million and an adjusted EPS of $(0.04).

Smith downgraded LendingClub Corp LC from Overweight to Neutral and raised the price target from $14 to $17.

Smith noted LendingClub’s marketplace-bank model, which combines a marketplace’s fee income with a bank’s interest income, personal loan market opportunity, and competitive positioning.

Investor concern has shifted from the credit quality of their loan portfolio to the availability of third-party funding and the company’s ability to grow its balance sheet and improve ROTE.

The rerating reflects the company’s roadmap, but it could take several quarters to play out, and the analyst prefers names with more visible near-term growth and monetization opportunities.

The analyst raised the price target to reflect tangible book multiple to 1.4x (from 1.2x) on improving credit trends and demand in the loan funding market, implying a modest discount to the SMID-cap bank average (1.7x), which he noted as fair until LC increases ROTCE (currently low single digits) to the SMID-Cap bank average through balance sheet growth and non-interest income.

Smith projected a fourth quarter of $210 million and an adjusted EPS of $0.10.

Smith maintained SoFi Technologies Inc SOFI with a Neutral and raised the price target from $9 to $16.

Smith flagged SoFi’s positioning and go-to-market strategy and noted the company would ultimately be a winner in the neo/digital bank space and could eventually become the “American Express” of fintech. That said, SoFi’s accounting methodology, precisely its fair value discount rate assumptions, are meaningfully lower than peers’ and remain a hot button for investors, likely limiting near-term stock upside.

SoFi currently trades at 3.8x tangible book. The price target reflects the promising outlook of non-interest income growth and improving GAAP profitability. Smith projected a fourth quarter of $679 million and an adjusted EPS of $0.04.

Price Actions: UPST stock is down 13.2% at $68.42 at last check Monday. LC is down 6.19%, and SOFI is down 2.47%.

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