Caution Required: Reason for Potential Caution Among Newcomer Financial Backers
Caution Required: Reason for Potential Caution Among Newcomer Financial Backers
Upstart Investors Rejoice as shareholders of Upstart Holdings (UPST 0.18%) have finally received some positive news. The company showcased strong progress in the third quarter, resulting in a significant boost for Upstart stock, which skyrocketed an impressive 53%.
A 53% increase is definitely an exciting development for shareholders, but one can't help but feel a tinge of skepticism. Such a notable surge often raises eyebrows, and if you've been following Upstart stock's history, you'll understand that this isn't an isolated incident.
Let's delve deeper into why the market is buzzing about Upstart and what investors should make of it.
Beyond Low Interest Rates
The third-quarter results surpassed expectations across the board. Revenue increased by 20% year over year, providing a much-needed boost to sales that had been stagnant for several years. Revenue reached $162 million, far exceeding the projected $150 million.
Adjusted earnings per share (EPS) were also well ahead of forecasts, sitting at $0.06 compared to Wall Street's prediction of $0.15. The net loss was significantly reduced from $40.3 million last year to $6.8 million this time around. Adjusted EBITDA also turned positive for the quarter, and management expects this trend to continue and grow.
CEO Dave Girouard emphasized on numerous occasions during the earnings call that the success was due to internal system enhancements and not just lower interest rates, which didn't start impacting the company until the very end of the quarter. Girouard explained that Upstart has been meticulously enhancing its machine learning systems, leading to efficiency improvements, cost savings, and an improved, higher-converting platform. While lower interest rates should provide an additional boost, management was quick to attribute the company's performance to internal improvements.
As Upstart's platform continues to evolve and the environment becomes more conducive to its offerings, the future looks promising. Upstart has managed to add 24 new lending partners this year and has continued to grow its network, even in challenging operating conditions. Auto loans, which increased by 46% year over year during the third quarter, are on the rise. Upstart also signed a new agreement to fund $2 billion worth of loans over the next 18 months.
Its new home equity loan of credit (HELOC) product is performing exceptionally well. The product has originated 600 HELOCs since its inception with no defaults, and its coverage extends to half of the population.
Jump on the Roller Coaster?
Historically, Upstart's success has been directly tied to the economic climate. With a relatively short history as a public company, its performance has shown significant volatility. While it demonstrated impressive growth during a period of low interest rates, the stock took a nose-dive when the good times came to an end.
Since then, Upstart stock has seen considerable ups and downs, soaring and plummeting on both good and bad news. The recent 53% surge follows this pattern. At the current price, Upstart stock is still 80% off its all-time high.
Investors are hopeful, considering that interest rates should now act as a tailwind instead of a hindrance. The job market is strong, inflation is cooling, and the economy seems to be in a good place. Lower interest rates combined with a robust economy could create ideal conditions for Upstart to thrive.
What should new investors do? At this point, Upstart stock might be suitable for those with a high-risk tolerance. Even if you're game for risk, it's advisable to limit this stock's presence in your portfolio. Upstart's current price-to-sales ratio of 12 is remarkably high compared to faster-growing companies. This suggests that the stock is priced for extensive growth, and any sign of pressure could cause the stock to drop significantly. Over a third of Wall Street analysts rate Upstart stock as a sell at its current price.
Even investors with a high-risk tolerance should only consider investing if they are confident in Upstart's long-term prospects. The road ahead may be filled with volatility, and investors should be prepared to weather the storm.
Given the impressive 53% surge in Upstart stock, some investors may be considering investing more money or increasing their position. However, it's important to note that Upstart's stock has shown significant volatility in the past, and its current price-to-sales ratio of 12 is quite high compared to faster-growing companies. Therefore, cautious investing with a focus on risk management might be advisable, as any sign of pressure could lead to a significant drop in the stock price. In the context of finance and investing, it's crucial to make informed decisions based on thorough analysis and understanding of the company's performance and market conditions.