Product innovation driving AI credit growth engine Morgan Stanley raises Upstart (UPST.US) target price to $70.

After the AI lending platform Upstart (UPST.US) announced its performance report, Wall Street financial giant Morgan Stanley raised the company's target stock price from $50 to $70 and maintained a "neutral" rating. The logic behind the institution's upward revision of investment returns mainly lies in loan recovery, pricing optimization, and diversified business driven by new product leadership. With the current uncertainty brought about by tariff and immigration restrictions, Upstart's risk-return profile is more balanced. This target price increase and valuation adjustment reflect the premium on AI credit models but require sustained support above expectations, as well as Morgan Stanley's upward revision of Upstart's profit forecast (2026 EPS expectation raised from $2.41 to $3.06) and stronger confidence in diversified business growth prospects. Financial data shows that the AI lending platform has matched loans totaling approximately $2.82 billion, a year-over-year increase of approximately 154% and a quarter-over-quarter increase of approximately 32%. New products (such as microloans, car loans, home loans, etc.) have contributed more than 10% of quarterly loan volumes. Benefiting from pricing optimization and business portfolio improvements, the company achieved positive net profit for the first time since the first quarter of 2022 calculated under US GAAP. Morgan Stanley's analytical team stated in its report that Upstart is actively expanding into verticals beyond personal credit loans, and new products such as microloans, car loans, and home loans are expected to contribute significantly to loan volumes in the second half of 2025 and 2026. The addition of these new businesses expands the company's customer base and scenarios, broadens the potential market size, and becomes a new engine for revenue growth. Upstart's management optimized interest rates and fees, allowing for flexibility in increasing the take rate. With loan matching volume growth in the second quarter, revenue per loan also increased year-over-year, contributing to higher gross margins. Along with cost controls, this enables Upstart to return to profitability and potentially maintain a growth trajectory. As the scale expands, operational leverage will further enhance, improving operating profit margins. Furthermore, adjustments in borrower structure have increased unit economic benefits. With coverage of a wider credit population, the platform is able to charge higher fees per loan. The proportion of super prime borrowers dropped to 26% in 2Q25 (down from 29% in the previous quarter), which means the platform can serve more average credit customers while maintaining risk control to earn higher returns. The company is dedicated to improving automated approval and risk modeling precision, swiftly reaching high levels of automated lending in new verticals to control costs and accelerate lending speed. Despite the positive developments, Morgan Stanley continues to give a "neutral" rating with the following considerations: Earnings improvement but high valuation: Upstart's profitability is recovering, with 2Q25 marking the first quarter of net profit since 2022, indicating the leverage effects of the business model. However, after a significant rise in stock price this year, the company's valuation indicators such as expected P/E ratio are near historical highs, reflecting high growth expectations from investors. Further upside potential needs to be carefully evaluated. Product structure optimization: Upstart is actively expanding its new lending product lines, with new products contributing over 10% of loan volumes in 2Q25. This business portfolio expansion helps expand its potential market (management estimates core market space to be in the range of $8-12 billion), providing new momentum for future growth. Additionally, more diverse products are expected to enhance penetration rates for different customer segments and strengthen revenue stream stability. Pricing capability and fee elasticity: The report highlights that average take rates remained strong this quarter, thanks to adjustments in customer structure and pricing optimization strategies. Specifically, the proportion of super prime borrowers in personal loans has decreased from 29% in 1Q25 to 26% in 2Q25, allowing more average credit borrowers to participate and enabling the company to charge higher fee rates. Furthermore, Upstart has fine-tuned loan rates and fees through AI algorithms, achieving precise pricing optimization that increases per loan income without significantly affecting business volume. This pricing flexibility is seen as a sustainable positive trend by Morgan Stanley, with the potential to further enhance the company's profitability. Credit cycle and macro sensitivity: As an AI-driven lending platform, Upstart's loan volume and performance are highly dependent on the overall economy and credit environment. If the macro economy cools (e.g., rising unemployment, declining income), borrowers' repayment ability and willingness may be affected, leading to increased credit loss rates directly impacting platform performance. Additionally, focusing on serving relatively weaker credit populations, the platform may face higher default rate increases in a downturn economy, putting its lending models to the test in extreme circumstances. This cyclical fundamental risk is one of the core reasons why Morgan Stanley remains cautious. Furthermore, while the current macro environment is relatively favorable, a resurgence of inflation pressure leading to further interest rate increases may reduce demand for consumer loans and rapidly raise funding costs. This could not only dampen the willingness of borrowers and lenders but also make it more challenging for Upstart to find funds for loans, weakening its loan matching business. Conversely, a decrease in interest rates could be a potential positive, but this factor depends on macro policies and is beyond the company's control. Risk and valuation balance: Despite ongoing fundamental improvements, Morgan Stanley emphasizes that the current stock price reflects a high degree of optimism. They believe that Upstart's valuation "threshold" has been raised, and in the current favorable macro environment, market demands for future earnings growth are relatively higher. If future growth or profitability falls slightly below expectations, the high valuation could lead to stock price fluctuations. Therefore, based on the balancing of profit potential and external risk factors, Morgan Stanley chooses to maintain a "neutral" rating, implying that the upside and downside potential at the current price level are largely symmetric, without a clear preference for significant excess returns or significant declines in the short term.