Louis Navellier is rating this stock an “A” – Get In Now!

On May 24, the man who found “the stock of the century” will reveal one of his top stocks for 2022 – for FREE – in a special presentation.

Tue, May 24 at 4:00PM ET

Fear the Wild Rally and Keep Your Distance from Upstart

Editor’s Note: This article was updated on Oct. 22, 2021, to correct a price target.

Start-ups can be exciting to invest in, and as the name suggests, Upstart (NASDAQ:UPST) is a newer business that’s seeking to transform an entire industry. With that in mind, it’s undoubtedly tempting for some folks to load the boat on UPST stock.

two businesspeople sit at a table stacking up coins in the shape of an ascending bar chart
Source: Shutterstock

Yet, I would suggest cooling your jets and taking some time to think about what you’re doing. Sure, Upstart offers a non-traditional approach to originating personal loans, but prospective investors must look at the big picture.

As we’ll see, Upstart’s revenue growth is impressive. At the same time, the rally in UPST stock has been mind-blowing – and maybe too much, too fast.

At the very least, value-focused investors should consider whether Upstart offers a favorable risk-to-reward profile. After all, sometimes an overeager trading community can assume that a company will be hugely successful, before it actually happens.

A Closer Look at UPST Stock

There’s no denying that Upstart had an auspicious start on Wall Street. The company’s initial public offering (IPO) took place on Dec. 16, 2020, after the company priced its offering at $20 per share.

In actuality, however, UPST stock’s first trade on the Nasdaq Exchange was for $26. The share price shot up 30% in afternoon trading on that first day, but that was just the beginning of the story.

Unbelievably, the buyers bid the share price up to $100 in February of 2021. Then, they pushed it to $200 in August, and $300 in September.

By mid-October, UPST stock was threatening to pierce the $400 mark. Meanwhile, Upstart’s trailing 12-month price-to-earnings ratio was close to 400.

So, we have a battle between the value investors and the momentum traders. For the time being, the “momo” traders are winning.

Therefore, I wouldn’t dare to short-sell UPST stock for fear of losing my shirt.

That having been said, it’s not necessarily a great idea to buy a stock after it just posted a 1,000%+ gain, as buying on hype can lead to serious capital loss.

Acknowledging the Fiscal Stats

Don’t get me wrong – Upstart isn’t in terrible financial condition. If anything, one could make the case that Upstart is exhibiting very rapid revenue growth.

But, let’s back up for a moment. First, we need to summarize Upstart’s business model.

What’s disruptive about Upstart is that the company’s seeking to turn the traditional loan paradigm on its head, by offering credit based on objectively assessed risk.

To achieve this, Upstart’s lending platform uses artificial intelligence and “sophisticated machine learning models” to (hopefully) more accurately identify borrower risk.

Hence, Upstart supposedly is able to approve more applicants than the traditional, credit-score-based lending models.

This business model seems to be working in 2021, at least from a fiscal perspective.

During the second quarter, Upstart’s revenues increased by a whopping 1,018% on a year-over-year basis, to $194 million.

A Significant Downgrade

Moreover, Upstart’s outlook is bright as the company expects to generate $205 million to $215 million in revenues during 2021’s third quarter.

Still, generating robust revenues might not justify Upstart’s current share price.

At least, Bank of America analyst Nat Schindler doesn’t seem too impressed with Upstart’s early-mover advantage in using artificial intelligence to originate loans.

Schindler downgraded UPST stock from “buy” all the way down to “underperform,” without making a pit stop at “neutral” or “hold.” He did, however, raise the price target to $300.

So, what prompted Schindler to flip to the bearish side? Apparently, valuation-related concerns are on his mind:

“While we see Upstart’s significantly higher growth rate vs. industry and Upstart papers trading at a premium as proof of Upstart’s differentiated ability to price risk, we think the current market valuation at 24X our 23E sales leaves little room for upside.”

This argument should resonate with investors who take traditional valuation metrics, like price-to-sales ratio, seriously.

The Bottom Line

You don’t have to avoid UPST stock just because of a big-bank analyst’s downgrade.

However, Schindler’s concerns are understandable. Even when a company is posting strong revenue growth, the market can sometimes get ahead of itself.

That might be what’s happening with Upstart right now.

So, cautious investors can choose to watch from the sidelines – and if they’re still bullish later on, they can get in if the share price comes back down to earth.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2021/10/fear-the-wild-rally-and-keep-your-distance-from-upst-stock/.

©2022 InvestorPlace Media, LLC