If I said a stock lost 40% of its value in a month, you’d think it was a disaster. That is not the case with Upstart (NASDAQ:UPST). Yes, UPST stock did recently and quickly fall 40%, but it is still up 500% this year. That’s because coming into that recent high, it had just terminated a 280% rally.
So far, the dip is merely testing the 50% retracement level. But if you go back a little bit further to the beginning of 2021, UPST stock’s rally was 1000%.
This is all to say that the story behind UPST is still solidly bullish. Today we will examine if the fundamentals agree with that thesis.
On the face of it, the company operates in many hot trends. At the heart of its business model is artificial intelligence (AI). The company touts proprietary uses of it to match up supply and demand. This brings us to the second side of it, which is the business of loans. Upstart links people who need loans with the appropriate lenders. Spoiler alert, the bullish thesis in UPST is absolutely viable.
A Closer Look At Its Cash Cow Business Model
According to their website, the company has already originated almost $17 billion in loans. Two thirds of them happened completely through Upstart’s automatic processes. Apparently these “ex-Googlers” knew what they were doing when they built their tech. This is a modern relative to the Lending Tree (NASDAQ:TREE) model from years ago. So I consider this a lead company, which usually are cash cows.
Upstart’s profit and loss statements support my opinion. Its current revenue rate is almost 5 times that of 2018. The company is also showing explosive growth; albeit, it’s still small. Moreover, it is even showing almost $60 million in net profits.
Statistically and using traditional metrics, this is not a cheap stock. The current price-to-sales ratio (P/S) is above 50x. Therefore, buyers of the shares now are giving it a lot of credit in advance. This is OK, so long as Upstart continues to grow because it will normalize the metric in time. Zoom Video (NASDAQ:ZM) went through something similar last year, when its P/S was 125x. Currently it is 100 points lower and in line with its peers.
Besides, this is a growth story so we shouldn’t even worry about valuation. It’s up to management to keep delivering the outstanding progress in revenues. For that, they have many verticals to chase. Currently their website specifically refers to auto dealers, but they could easily expand into other markets.
Sometimes the bullish thesis is so clear that we don’t need to overthink it. There is little doubt that Upstart has a bright future ahead of it. Therefore, if you’re wondering if UPST stock is worth owning, then the answer is yes.
It merely comes down to choosing the proper points of entry. By that I don’t mean waiting for the perfect spot, but rather, to avoid committing obvious mistakes.
UPST Stock Is a Buy… Just Pick Your Level
A month ago, the stock was exploding into $400 per share. It is now almost $150 cheaper. This makes much more sense. I am a conservative investor, so I would even wait for lower prices still. I anticipate resistance if the stock rebounds. Ideally, patient investors can pounce on it closer to $200 per share.
Those who believe in filling gaps on charts could argue that eventually it has to fall to $160 per share. Many entry points, which suit various risk appetites, lie somewhere along this downward path. Chasing it at $400 per share was wrong, but waiting for the absolute perfect entry is futile.
A stock that’s this volatile presents a perfect argument to use options. Instead of risking $250 today to own shares, you can collect credit to potentially own it at $185. The practice of selling puts in lieu of owning shares makes sense in this case.
Using options is a daunting task to many investors, but in this case, it would provide a buffer. Selling a put results in a credit into your account and doesn’t even require a rally to win. And the worst case scenario means that you get to own the shares at a 25% discount from current price.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.