Investors should sell the low-quality rally in shares of Upstart Holdings (NASDAQ:UPST), said analysts at a top tier Wall Street equity research firm Morgan Stanley. The cautious comments impacted the stock Monday morning, helping fuel a decline of over 9%.

Upstart is scheduled to report second quarter earnings on August 8, and Morgan Stanley expects disappointing results.

“Credit continues to underperform on a relative basis, with monthly annualized net loss rates hitting record levels. As we await clarity on the underlying economics of the committed capital arrangements, we recommend investors fade what appears to be a low-quality rally,” said equity analysts at the firm.

“Aside from minor improvement in July, delinquencies remain elevated, resulting in record annualized losses. While the sequential improvement in delinquencies from June (4.89%) to July (4.82%) is a slight positive, the rapid rise in delinquencies since [the second half of 2022] have translated to record annualized loss rates, with July’s monthly annualized loss rate of 23.9% representing 541bps of deterioration [month-over-month] and 1225bps of deterioration [year-over-year],” the analysts wrote in a note to clients.

They think recent gains in the stock were a low-quality share price appreciation driven by factor flows, AI, and lower short interest.

The analysts explained, “While short interest as a percentage of float reached highs of ~47% in late-February, the metric bottomed in April prior to the committed capital announcement and has since stabilized at ~37%. This dynamic, in addition to ~83% correlation to NVDA shares on a YTD basis, has driven a relatively low-quality rally that we would recommend investors fade.”

Morgan Stanley has an ‘underperform’ rating on Upstart’s stock with a price target of $13. Shares closed at $60 on Friday.