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Morgan Stanley upgrades On Deck to 'equal-weight' on better risk/reward balance

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Morgan Stanley upgrades On Deck to 'equal-weight' on better risk/reward balance

Morgan Stanley analysts upgraded digital lender On Deck Capital Inc. to "equal-weight" from "under-weight," saying the stock valuation now provides a better risk/reward balance.

The analyst cut the price target to $3.50 from $4.00.

On Deck reported second quarter adjusted EPS of 9 cents, which was lower than the S&P Global Market Intelligence estimate of 12 cents, and cut its forecasts for gross revenues, net income and adjusted income for full year 2019. The company in the earnings call said it lost its partnership with JPMorgan Chase & Co., which agreed in 2015 to originate new loans through On Deck's platform. The online lender's stock plummeted to an all-time low after it reported its quarterly earnings

The analysts said these events have resulted in cuts in the full-year 2019 adjusted EPS estimate to 33 cents from 38 cents and full-year 2020 adjusted EPS to 43 cents from 50 cents. Despite these various downward revisions, they believe that OnDeck's stock price is now trading closer to a range where they think it will balance its high growth and high-risk outlook, which is the main factor for the stock upgrade. The Morgan Stanley analysts still expect the company to continue outpacing peer banks' earnings, but they also noted that On Deck's price-to-earnings ratio estimate is at the lower end of U.S. banks, according to the research note.

For Morgan Stanley, the base scenario is for gross revenues to slow in high single-digits in 2020 and for low to mid-single-digit net revenue growth due to higher loan loss provisioning. Potential catalysts for the stock include significant acceleration or deceleration of loan origination; pace of gaining traction with bank partners; and small business operating conditions in the U.S., Canada and Australia.