Upstart Is a Great Company With a Very High Valuation

There’s really a tremendous amount to like about Upstart (NASDAQ:UPST) stock. In fact, back in April, I wrote a very bullish article on the shares, stating that the name ” is a buy for growth investors” and touting the high value of the company’s highly specified artificial intelligence technology for lenders. Since my article was published, the shares have more than tripled.

A stock image of a brain with the letters AI
Source: shutterstock

With Upstart continuing to rapidly add more banks to its customer base  and beginning to enter the auto lending space, I am sure that it has a tremendous room to grow. And the company’s financial results continue to be stupendous.

Two Ways to Handle UPST Stock

Nevertheless, given the current, extremely high valuation of UPST stock, I think that the shares are likely to fall sharply on even a small hiccup by the company, the banking sector, or the stock market. Consequently, I would advise investors to wait for a substantial pullback in the shares before taking a bullish position in them.

As an alternate  approach, however, long-term investors could consider taking a relatively small, bullish position in the shares now. In case there is no market or sector pullback or problems with the company, this would enable UPST stock to continue to rally.

Then, if the shares do subsequently drop sharply on weakness, these investors could take a much bigger, bullish position, lowering their average costs and leaving them very well-positioned.

Upstart’s Booming Business and Its Growth Outlook

In the second quarter, the AI software maker’s revenue soared 60% year-over-year to $194 million. The company’s net income, excluding certain items, came in at $37.3 million. This is in comparison to a loss of $3.7 million in the identical quarter a year earlier.

“Bank partners originated 286,864 loans, totaling $2.80 billion, across our platform in the second quarter, up 1,605% from the same quarter of the prior year,” the company stated in its earnings press release. For all of 2021, Upstart expects its sales to soar 221% YOY to about $750 million.

As of the end of Q2, the company’s customer base totaled only 25, giving it a great deal of room to continue its tremendous growth. Moreover, Upstart CEO Dave Girouard, speaking on the company’s earnings conference call, noted that one of the banks that uses its platform elected to no longer automatically refuse to provide loans to consumers whose credit score did not meet a minimum level.

That information made me realize that, over time, banks could decide to stop using credit scores altogether and rely solely on Upstart’s platform. Such a development would likely enable Upstart to increase its prices because the banks would become much more reliant on the company’s platform and have  excess funds as a result of no longer having to pay the credit rating agencies.

Finally, Upstart has entered the auto lending market this year. According to Girouard, the auto lending space is “at least 6x larger than personal loans and at least as inefficient.” On Oct.6, the company announced the launch of  Upstart Auto Retail software. The product uses AI to evaluate potential car buyers’ creditworthiness.

“With the addition of Upstart-powered loans, dealerships will be able to instantly offer affordable financing to more of their customers,” Upstart reported.

Going forward, Upstart has a great deal of room to grow in the personal loan and auto loan sectors.

A Very High Valuation

UPST stock is trading at a forward price-sales ratio of nearly 28 times, and its forward price-earnings ratio is about 220 times. Those are very high valuations. Often, stocks with valuations that elevated end up undergoing a steep correction, if the company’s financial results miss analysts’ average outlook by a small amount.

In fact, the shares’ very high valuation led Bank of America analyst Nat Schindler to downgrade the shares to “underperform” from “buy.” on Oct. 18. The analyst cut his rating on the share because he thinks that “the stock’s near-term upside {is} priced in,” Seeking Alpha reported.

The Bottom Line on UPST Stock

Upstart has a very bright future, but the shares are pricey now. I recommend that investors utilize one of the two approaches towards the shares that I described above.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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