Product Innovation Drives AI Credit Growth Engine Damo Raises UpStart (UPST.US) Target Price to $70

The Zhitong Finance App learned that after Upstart (UPST.US), a lending platform based on artificial intelligence (AI) technology, announced its performance report, Wall Street financial giant Morgan Stanley raised the company's target share price from $50 to $70 to maintain a “neutral” rating.

The agency's logic for increasing return on investment is mainly based on loan recovery + pricing optimization + diversified business driven by new products, and under the current valuation and macro/credit cycle facing huge uncertainty brought about by policies such as tariffs and immigration restrictions, Upstart's risk-return is more balanced. This increase in the target price and valuation reflects the AI credit model premium, but it requires continued support beyond expectations, as well as Damo's confidence in the revised Upstart profit forecast (EPS forecast raised from $2.41 to $3.06 in 2026) and stronger prospects for diversified business growth.

According to financial data, the total amount of loans matched by the AI loan platform was about US$2.82 billion, a sharp increase of about 154% year on year and 32% month-on-month. New products (such as microfinance, car loans, housing loans, etc.) contributed more than 10% of the quarterly loan volume. Thanks to pricing optimization and improved business portfolio, the company achieved net profit correction according to US GAAP for the first time since the first quarter of 2022.

The Dama analysis team said in the research report that Upstart is actively expanding vertical fields other than personal credit loans, and the contribution of new products (such as microfinance, car loans, housing loans, etc.) to quarterly loans is expected to increase further in the second half of 2025 and 2026. Damo said that these new businesses have broadened the customer base and scenarios of the company's services, expanded the potential market size, and become a new engine for performance growth.

Upstart management optimized and adjusted interest rates, so that the take rate (platform deduction rate) has room for flexible improvement. Damo said that while loan matching volume increased in the second quarter, revenue from each loan also increased year-on-year, thus contributing to higher gross profit. Combined with the control of operating expenses, this has enabled Upstart to regain profits and is expected to maintain its profit growth trajectory. As the scale expands, the operating leverage effect will be further enhanced to drive the improvement of operating profit margins.

Furthermore, the adjustment of the borrower structure has improved the economic efficiency of the unit. Damo said that with the coverage of a wider range of creditors, the fee rate obtained by the platform from each loan has increased. The share of 2Q25 ultra-high quality credit borrowers fell to 26% (29% in the previous quarter), which means that the platform can obtain higher returns by serving more medium credit customers while ensuring manageable risk. Furthermore, the company is committed to improving the accuracy of automated approval and risk models, and has also quickly reached a high level of automated lending in new vertical fields, which helps control costs and increase the speed of lending.

As to why it is still rated “neutral”, Damo gave the following various considerations in the report:

Profitability improved but overvalued: Upstart's profitability began to recover — 2Q25 achieved its first quarterly net profit since 2022, indicating that the business model is re-reflecting the leverage effect. However, after experiencing a sharp rise in stock prices this year, the company's estimated price-earnings ratio and other valuation indicators are already near historical highs, reflecting that investors have high expectations for its growth, and the room for further growth needs to be carefully assessed.

Product structure optimization: Upstart is actively expanding new loan product lines. New products such as microfinance, car loans, and housing loans have contributed more than 10% of loan volume in 2Q25. This broadening of the business portfolio will help expand its potential market (management estimates that the core market space is between $8 billion and $12 billion) and provide new impetus for future growth. At the same time, more diverse products are expected to increase the company's penetration rate to different customer groups and enhance the stability of revenue sources.

Pricing capacity and rate flexibility: According to the report, the platform's average charge rate (take rate) remained strong this quarter, thanks to customer structure adjustments and pricing optimization strategies. Specifically, the share of ultra-high credit rating (super prime) borrowers in personal loans has dropped from 29% in 1Q25 to 26% in 2Q25, which means more medium credit borrowers participate, so companies can charge higher fee rates. Furthermore, Upstart adjusts loan interest rates and processing fees through artificial intelligence algorithms to achieve fine optimization in pricing, increasing unit loan revenue without significant loss in business volume. This pricing flexibility is viewed by Damo as a sustainable positive trend, which is expected to further increase the company's profitability.

Credit cycle and macro sensitivity: As an AI-driven loan aid platform, Upstart's business volume and loan performance are highly dependent on the overall economic and credit environment. If the macroeconomy cools down (such as rising unemployment and falling income), borrowers' ability to repay and their willingness to borrow will suffer, and an increase in the credit loss rate will directly impact the platform's performance. Furthermore, Upstart focuses on serving people with relatively weak credit. In times of economic downturn, the default rate of this customer group may increase even more, and the lending model is tested under extreme circumstances. This cyclical fundamental risk is one of the core reasons why Dammam is currently cautious.

Furthermore, although the recent macroeconomic environment is relatively favorable, if interest rates rise further due to renewed inflationary pressure, demand for consumer loans may decrease, and capital costs will rise rapidly. This will not only reduce the will of borrowers and lenders, but may also make it more difficult for Upstart to find capital for loans and reduce its matching business volume. In contrast, lower interest rates are potentially beneficial, but this factor depends on macroeconomic policies and is not controlled by companies.

Risk and valuation balance: Although fundamentals continue to improve, Damo emphasizes that current stock prices reflect a large degree of optimistic expectations. They believe that Upstart's valuation “threshold” has been raised, and under the current favorable macro environment, the market's requirements for future performance growth have also increased relatively. If future growth or profit falls short, high valuations may cause stock price fluctuations. Therefore, based on the trade-off between upward profit potential and external risk factors, Damo chose to maintain a “neutral” rating, implying that the current price upward and downward space is generally symmetrical, and there is no obvious bias of excess earnings or significant decline in the short term.