It’s really interesting to watch Wall Street suddenly sour on a high-flying stock. We are witnessing this happen to Upstart’s (NASDAQ:UPST) stock in real-time. One day your stock is the greatest thing since sliced bread. The next day you get double downgrades from Bank of America.
Analyst Nat Schindler downgraded the stock two notches from “buy” to “underperform” mostly due to valuation concerns. UPST stock had performed remarkably in a short time frame. The stock rose by approximately three times from around $134 in early August to its all-time high of just over $400. I don’t think these growth concerns are warranted, though, as the company is targeting the lucrative auto loans industry.
Schindler was more skeptical writing “Although auto loans represent a much larger [total addressable market], we also highlight the higher barriers to entry with more competitors and established, well-capitalized institutions,” Bank of America has a target price of $255 for UPST stock.
I have been in the market long enough to see this cycle multiple times. Stocks that analysts have soured on can take a few weeks of beatings. Eventually, however, the high-quality companies always recover and reach new highs. The question then is if Upstart is one such company.
Upstart Continues to Its Expansion Phase
Upstart had another blockbuster. Yet UPST stock has dropped more than 40% in the last month. The market can be odd sometimes as the company’s results are fantastic. In Q3 2021, the company reported revenues of $228 million. This was an increase of 250% compared to the same time last year. The vast majority of this revenue was generated from fees. The total fee revenue for the quarter was $210 million.
In addition to the huge revenue growth, Upstart has shown vast improvements in other metrics as well. The company’s banking partners originated 362,780 loans worth about $3.13 billion. This was up 244% from Q3 2020. This shows me that the company’s overall platform reach is continuing to expand.
The company’s revenue increase was mostly from new loans instead of new fees to existing customers. This is incredibly important for companies like Upstart which need to maintain high growth rates.
Conversion on rate requests showed improvement as well. This metric was up 23% in Q3 2021. The company defines its conversion rate as the number of loans transacted divided by the number of rate inquiries. This is a measure of how effective Upstart is in its sales conversion funnel.
Having a 23% conversion rate is extremely impressive. This metric validates the strength of Upstart’s Artificial Intelligence and Machine Learning platform. It shows that its technology is a competitive advantage and could not be easily replicated by competitors.
Plenty of Upside for UPST Stock
Now that UPST stock has dropped quite a bit, long-term-oriented investors can consider building out a position. As mentioned, Bank of America has a target price of $255 for UPST stock. However, this is in the lower portion of analysts’ price target range.
The sell was so overdone that UPST stock now trades below the average price target. UPST stock has an average 12-month price target of $286.88. This represents a 54% upside from UPST’s current price.
The company has been relatively conservative with its earnings guidance. For Q4 2021, the company is guiding for revenues between $255 million and $265 million. Using the midrange of this guidance, this is about 14% sequential quarter-over-quarter growth. The company expects a contribution margin of 47%. This will translate to about $51 million to $53 million of EBITDA.
In my view, there is a chance that the company would outperform this guidance. Remember that Upstart’s business model is a platform. This means that it has the potential to scale exponentially given the right conditions.
I continue to like UPST stock.
On the date of publication, Joseph Nograles 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.
