Very few stocks can do what Upstart (NASDAQ:UPST) did in past few months. After its initial public offering (IPO) last December, UPST stock rallied some 1,500%. In the summer, I was lucky enough to have recommended going long in UPST under $130 per share. Then it exploded higher thereafter. But the bad news is that moves this violent tend to reverse — and this one in fact did.
No one could really explain why the rally happened this massively, so it was dangerous near the top. And those who blindly chased into it up there are now sitting on tremendous losses. This week, UPST stock reverted almost to my base. This is where it becomes interesting again for another bullish attempt.
UPST has almost filled an open gap from the August rally base. So, the bears have done a tremendous job reverting it to its mean and then some. Now those who feel like they missed it on the way up have a chance at getting on board.
UPST Stock Has a Viable Bullish Thesis
Fundamentally, UPST stock has reason to be bullish. Total revenues, albeit still small, are growing fast. Management has even eked out a rolling 12-month positive net income. Clearly, they are going in the right direction and the stock needs time to mature. This is not a cheap stock yet, but those metrics can normalize over time. For that to happen, it’s imperative that Upstart maintains its growth path.
The description of this company’s operations is a list of current popular themes. Upstart offers cloud and artificial intelligence (AI) solutions for the lending industry. Therefore, I would consider this a fintech company that is on the forefront of technology and trends.
On paper, there’s no reason to doubt its future prospects. There is a global effort to digitize everything, so demand on its services will remain high. Now the onus is on management to continue executing its plans this well. The recent weakness is correcting an unwise rally. From its IPO, UPST rallied nearly 1,500% before crashing in October.
UPST stock is also still young on Wall Street and needs to earn its stripes. The stock needs time to attract the attention of expert analysts. Currently, according to Yahoo! Finance, it only has eight analysts covering it, seven of which like it as a buy.
Moderation Is Key
Technically, after this massive round trip rally, UPST stock is falling into support. From here, the bears will need to work much harder to chop it down further. There is also extrinsic risk to consider from the markets in general. The U.S. Federal Reserve is ready to end its quantitative easing (QE) program and perhaps start its tightening cycle. This could spook markets thereby putting more downside pressure on UPST stock.
Regardless of how big the drop has been already, we cannot assume that it’s in absolute bottom. Investors would do well to leave room for error. Catching falling knives that move this fast is dangerous business, so going all in is somewhat reckless. Partial positions make for a reasonable middle-ground course of action. Using options is also viable because it opens the door for alternative strategies.
For example, selling a put below the current price allows me to be long with room for error. The bottom line is that, when stocks move this fast, investors need to be cautious about making absolute judgment calls. I like this stock now much better than above $300, but I’m not blind to the risk that still exists. The bigger pivot point for UPST stock is under $120 per share.
On the date of publication, Nicolas Chahine did not hold (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.
