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 (NASDAQ: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 (NYSE: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.

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