Despite its name, Upstart (NASDAQ:UPST) is no upstart, as it’s been in business for about a decade. But last year, UPST stock did seem to come out of nowhere, to become a top performing name.
The fintech firm, whose platform enables lenders to assess credit risk using artificial intelligence (AI), went from an initial public offering (IPO) price of $20 per share, up to as much as $401.49 per share in October.
But as the market turned on tech stocks starting in November, due to the Fed’s steady move toward raising interest rates, this one-time meme favorite has experienced a sharp price decline.
After falling back to double-digit prices late last month, it has since bounced back a bit, and now changes hands for around $94 per share. With its underlying business still growing at an above-average pace, coupled with the fact that it’s consistently profitable, among scores of former high-fliers in tech, this may be one to consider.
Assuming, if you are of the belief that with the January correction, the market has priced in upcoming hikes to interest rates. If this winds up being the case, shares could continue with making a partial price recovery.
The Latest With UPST Stock
It’s no mystery that Upstart has fallen so far, so fast, since November. With interest rates going up, the lofty price-to-sales (P/S) and price-to-earnings (P/E) multiples tech stocks have sported throughout the pandemic era are going down.
Added to this, is that fact that, even among tech names, things went a bit too far with UPST stock. Speculators read too much into its extremely high rate of annual revenue growth during 2021 (245.6%). Failing to account for the fact it was set to decelerate in 2022, they did up shares to unsustainable levels. Together, both these factors have slammed Upstart down, to a reasonable price. Perhaps, a more than reasonable price.
Why? For starters, business continues to be booming for Upstart. It continues to lock down more financial institutions like banks and credit unions as clients for its artificial intelligence (AI) lending platform. While revenue growth is slowing down, its top line is set to grow by 49.5% this year. The top end of sell-side estimates call for earnings per share (EPS) of $3.61 in 2022 as well.
Admittedly, the stock’s current P/E multiple of 54.2x largely reflects this high growth potential. But assuming it delivers results in-line or ahead of expectations, there may be room for it to continue its recovery. Assuming, of course, that the market environment does not become more unfavorable for growth plays.
UPST Next Move Depends on What Happens With Interest Rates
So, if the more bullish thesis described above plays out for UPST stock, how far could it climb? We’ll assume that hitting $3.6 per share in earnings is attainable. We’ll also assume that the market has fully absorbed rate hikes, with valuation multiples slightly expanding rather than contracting.
As I’ve discussed previously, a P/E of 60x could be justified for Upstart. Especially, as it continues to see high double-digit growth, fueled by more institutions adopting its platform for assessing risk for auto loans, personal loans, and other types of lending. Take $3.60, multiply by 60, and a return to $216 per share may not be out of reach.
The catch? Whether shares more than double in price hinges heavily on the next steps the Federal Reserve takes with interest rates. If it winds up just raising rates three times this year, at 25 basis points (0.25%) per raise?
The market has already priced this in, and then some. But if the more pessimistic forecasts of many more rate hikes, or a rate hikes greater than 25 basis points wind up happening?
If Upstart’s business continues to post around 50% annual growth, the downside risk may be minimal. A move to more than $200 per share though? That likely will not happen. In the event its growth falls short of estimates, perhaps due to an economic slowdown following the post-pandemic boom? Another double-digit percentage plunge could occur.
The Bottom Line
Many, including myself, believe the market has not yet absorbed the impact of rising interest rates. That said, taking the opposite view could pay off if it winds up being the correct one. High-quality tech names like Upstart may prove to be relative bargains in hindsight.
If you believe the Fed’s upcoming rate hikes are already priced-in, UPST stock is a growth-at-a-reasonable-price opportunity. Continued strong results, and a modest bump up in its earnings multiple, could send it back above $200 per share.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.