Upstart Is Finally Approaching a Tradable Bottom

For awhile, Upstart (NASDAQ:UPST) had an appropriate name. Ever since it started trading  following its initial public offering (IPO), UPST stock only rose. At one point, Upstart’s shares had zoomed up 1,000% within a 12-month period. It was truly incredible to watch.

The website for Upstart (UPST) is viewed through a magnifying glass focused on the company's logo.

Source: Postmodern Studio /

Unfortunately, the rally was built on quicksand. The company’s underlying business didn’t come anywhere close to justifying a $200 stock price, let alone the $400 peak that it ultimately hit. As I warned last fall, Upstart’s shares were set to crash.

And wow have they ever. The stock is now down over 70% from its 52-week highs. The shares peaked shortly after an infamous CNBC interview in which an analyst talking about UPST stock gave it a strong recommendation based on technical analysis but did not know anything about the company’s business model.

As the old expression goes, however, there’s a difference between a company and a stock. A stock price can have little relationship to a firm’s actual value, as Upstart’s unwarranted run last year showed. With UPST stock back down to slightly over  $100 once again, however, is its valuation justified?

Don’t Value Upstart Based on Its Revenues

Many analysts like to use price-sales ratios to value growth stocks. And that’s understandable to a degree. If a company is eventually going to grow to a point at which it can earn fat profit margins, then its total revenue is a highly important metric. Companies can get a large share of their markets today and then figure out how to optimize their profits and cash flows later.

However, using price-sales ratios alone to value firms can be risky, as an overreliance on the metric incentivizes companies to grow their revenue without paying much attention to their costs.

That’s why Teladoc (NYSE:TDOC), for example, has grown its revenues tenfold in recent years but loses more money than ever, while its stock price has collapsed. Revenue growth that’s paired with low, declining profit margins is not worth much.

So how does Upstart stack up? It’s important to note that Upstart’s system analyzes the creditworthiness of consumers. In lending, there is always an incentive to cut rates, fees, or documentation requirements in order to make more loans. Ask the former shareholders of Fannie Mae, Bear Stearns, Washington Mutual, or Lehman Brothers how that worked out. Those firms all went bust during the 2008 financial crisis as a result of their inadequate risk-control measures.

So Upstart’s revenue growth in a vacuum doesn’t really impress me The Upstart bulls had very little to support their thesis  last year, and the shareholders who bought the name near its top have lost a great deal of money.

Upstart Is Profitable

What makes UPST stock potentially viable, at least as a name to trade, is that the company earns money. Unlike, say, Teladoc, Upstart does actually generate profits on its transactions.

Now, to be clear, Upstart isn’t making much money. Even after dropping by 70%, UPST stock is still selling at 55 times the firm’s 2021 earnings. That’s no bargain. And with the company’s earnings growth slowing, it’s selling at a hardly more inspiring 45 times analysts’ average 2022 earnings. So it’s not a value stock by any means.

Upstart’s shares are also selling at 88 times its EBITDA. That’s an excessive valuation for almost all software businesses, let alone for Upstart which is in the lending industry.

However, Upstart does have a kernel of a real profitable business.  Will the company wind up being worth $100 per share over the long term? Probably not. Upstart’s IPO price was just $20 per share not too long ago, after all.

However, Upstart is not as bad of a company as many of the other so-called disruptive stocks. All these names are dropping at the same rate. But Upstart is fundamentally a better business than other holdings favored by investors like Cathie Wood,  such as Teladoc, Skillz (NYSE:SKLZ), and TuSimple (NASDAQ:TSP).

So when traders look through a list of stocks that are down around 50% -75%, they’ll find Upstart which has real earnings and cash flow. Upstart doesn’t make much money,, but it is slightly profitable. And in this day and age, with so many firms out there burning cash or lacking any revenue at all, Upstart has a little bit of an advantage.

The Verdict on UPST Stock

I’ve been negative on UPST stock for a long time., and that’s been the right call, as its shares have collapsed over the past three months.

My long-term view on the company hasn’t changed. It’s really hard to disrupt the lending market, and banks are very good at what they do. Most fintech companies end up failing. Beware of what will happen to companies like Upstart when the economy slows down and interest rates rise.

That said, these are problems for another day. As things stand now, UPST stock has just lost 70% of its value in virtually a straight line. The selling now isn’t based on fundamentals, but on pure fear, liquidations, and margin calls.

When a stock has been decimated like Upstart has, it usually bounces back. A relief rally back up to about $150 per share by Upstart would make a lot of sense after its huge decline . Ultimately, I remain deeply skeptical about Upstart’s business prospects. But, for now, the bears have had their fun.

Traders should look for gains by Upstart and other battered fintech names in the coming days and weeks.

On the date of publication, Ian Bezek 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 Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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