It’s been an onslaught in growth stocks, regardless of quality. Upstart Holdings (NASDAQ:UPST) hasn’t fared too well in the selloff either, with UPST stock down 64% from its high in mid-October.
The stock actually held up pretty well given the selling pressure in growth stocks. For instance, when Upstart hit its all-time high on Oct. 15, the Ark Innovation Fund (NYSEARCA:ARKK) was 27% off its all-time high.
That’s even with its largest holding — Tesla (NASDAQ:TSLA) — surging higher and just a hair from its all-time high. ARKK is a good proxy for growth stocks, as Cathie Wood has had the fund investing in dozens of the top growth companies over the past few years.
The question now becomes, can Upstart recover and if it can, how far can it go?
Why I Like UPST Stock
I like Upstart because it continues to outperform on its growth estimates. The company went public in December 2020 and it has churned out impressive results over the past year. It has beaten earnings and revenue expectations in each of its four reports as a public company.
Most recently, Upstart delivered earnings of 60 cents a share on revenue of $228.5 million. That beat expectations by 27 cents a share and $13.6 million, respectively. Management’s outlook calls for sales of $255 million to $265 million in the fourth quarter vs. analysts’ expectations of $227.6 million.
But the stock market doesn’t care right now. Shares gapped lower by 22.6% (and closed lower by 18.2%) on the day after earnings. Good, bad or ugly, investors are selling growth stock regardless of what they report.
However, we’ve seen revenue estimates for 2021 climb from less than $250 million at the start of the year to more than $800 million currently. Revenue estimates for next year stood at sub-$500 million at the start of the year vs. $1.14 billion currently.
Overall, analysts expect nearly 250% revenue growth this year. Obviously not sustainable over the long term, those estimates dip to “just” 46% in 2022 and 26% in 2023.
Don’t Forget About the Bottom Line and Valuation
A typical growth stock may come under pressure when it has a high valuation or isn’t profitable. That’s regardless of its revenue growth rate, particularly at a time when the whole group is under pressure.
With UPST stock though, the valuation is reasonable (in my eyes) and the company is profitable.
The company is forecast to earn $1.96 a share this year and $2.42 a share next year. Like the revenue estimates, expectations for earnings have climbed considerably over the past 12 months.
While that may leave Upstart stock trading at a somewhat high earnings-based valuation, that’s to be expected with a high-growth stock. On a revenue basis though, shares trade at 10 times 2022 revenue.
That’s not cheap necessarily, but it wasn’t out of the question to see a stock trade at 15 to 20 times forward revenue a year ago while being far less quality than Upstart.
Further, Upstart is free cash flow positive and has been for the past four years. While the company did recently tack on some $600 million in long-term debt, it boasts more than $1 billion in cash and equivalents.
Trading UPST Stock
Is there a guarantee that UPST stock will hold the $160 level as support? No, not at all!
It could break this level — which is the low in each of the last two weeks — and put the $140 level in play. There it finds the gap from August that kickstarted the huge rally to $400.
Keep in mind, Upstart is also clinging to the 50-week moving average.
However, if UPST stock can find its footing in the near term, bulls will be looking for a move back over the 200-day moving average. Above that measure and the $200 mark could have investors looking at the 10-week and 21-week moving averages.
While that seems like a modest rally, it would represent roughly 50% to 55% upside from current levels.
A move above $270 and the 50-day moving average puts the gap-fill in play from November at around $308. If UPST stock climbs to this level, it will represent roughly a double from current levels.
Remember, growth stocks are in a bear market, but there is potential in the quality holdings once the dust settles.
On the date of publication, Bret Kenwell 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.