Upstart Stock Is an Attractive Buy in Front of Earnings

  • Upstart (UPST) shares have been slammed on macro and loan quality worries and large bearish short interest.
  • UPST stock may have bottomed in front of a nearby earnings catalyst.
  • Bullish investors should use a strategically placed collar for a stronger risk profile.
In this photo illustration the Upstart (UPST) logo seen displayed on a smartphone screen

Source: rafapress / Shutterstock.com

April was an all-around ugly one for the U.S. stock market. But it was particularly harder on higher multiple, growth stocks. And as a cloud-based artificial intelligence (AI) loan referral upstart, it should come as little surprise that Upstart (NASDAQ:UPST) was a sacrificial lamb. UPST stock has been carved up by nearly one-third.

Maybe more of a revelation? At this past month’s low Upstart shares have fallen as much as 82% from last October’s peak market price of $401.49. Moreover, the steep decline in UPST stock occurred despite the outfit offering investors a much rarer, mid-cap, fintech growth story with actual profits.

Is Upstart the perfect investment? Not quite, although for some of UPST’s 26% bearish short interest, shares may rank up there with the best of them given the profitable decline.

But today, it may be a good time to look at the fintech with a more optimistic set of eyeballs. With that said, let’s determine how to approach a UPST stock purchase in front of next week’s earnings event.

Ticker Company Current Price
UPST Upstart $85.46

The Bulls and Bears in UPST Stock

It wasn’t that long ago UPST was one of Wall Street’s most dearly held momentum plays. From its IPO in December 2020 to its peak less than ten months later, shares gained nearly 1,100% and reached a valuation just north of $30 billion. The rest is history and much to the chagrin of many longer-term investors.

Stock cycles come and go of course. And momentum like UPST’s, when it ends, can be all the more punishing. On the macro level though, an unfavorable interest rate policy that’s about to become more stingy with another 50 basis point hike forecasted, has been adding gasoline to the fire in UPST stock’s bear market.

Today, fearful bulls and more confident, less upbeat UPST bears are pricing in a weaker loan market due to anticipated hamstrung consumers, tighter lending standards by banks, as well as looser loan standards which apparently Upstart’s algorithms see as attractive, but which its underwriting human counterparts might cringe at.

Yet so far none of the drags weighing on shares have materialized in a meaningful way. They could of course. But without getting too ahead of ourselves, this past quarter UPST’s management confidently guided revenue growth of 65% for next week’s first quarter results, net income to increase by at least 80% and full-year sales to climb by 65%.

UPST Stock Is a Terrific Contrarian Buy

Upstart Holdings (UPST) showing deeply contrarian double bottom in front of earnings
Source: Charts by TradingView

Right now there’s other reasons to be more open-minded and bullish on UPST.

It’s fair to say the current bearish pricing in UPST stock is as determined as the bullish stock scheming of investors. After all, Upstart soared to notoriety with its inflated, but justified valuation. Don’t believe me? Well, let’s roll back the clock a bit.

On Oct. 15, EMJ Capital’s Eric Johnson offered a less-than-timely and bullish judgment stating UPST stock “should be a $1,000 stock today.” Arguably, it probably didn’t sound laughable at the time as shares fetched $400. Ignominiously though, that would become the exact top in Upstart.

Technically, the price chart has quickly also turned agreeable with a contrarian investment approach in UPST stock.

This week Upstart shares have confirmed a bullish-looking double-bottom backed by a positive stochastics setup after testing Bollinger band support. And since stock action isn’t physics, it’s also easier to view multiple trendline and Fibonacci failures as technical evidence to be embraced, rather than fearfully avoided.

Bottom Line on UPST Stock

While I’m upbeat on Upstart’s chances of rallying strongly out of the stock’s reversal pattern, earnings and its associated gap risk, are still reasons against a purchase of UPST stock. And with a buy decision like this so close to the report, it could do considerable damage to a stock position despite already epic losses in shares.

Let’s take a cue from CNN’s analyst community, which sees a floor of $70 — roughly 18% below UPST’s stock price. Considering this, we might take a slightly less optimistic upside target below the median 12-month $180 forecast, and implement a partially, but smartly hedged and actively managed, modified stock collar on shares.

One favored combination is to buy UPST shares in conjunction with a protective June $80/$65 put spread and sell a June $115 call. Not only should this advanced options strategy do a solid job of eliminating the bulk of UPST stock’s downside potential through earnings and over the next several weeks, but it also allows for strong upside capture and can be put on for a credit.

On the date of publication, Chris Tyler 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.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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