Upstart reported a strong quarter, but there’s more to the story.
Upstart Holdings (UPST 1.45%) shareholders have been waiting for some good news for a while now, and it’s finally come. The company reported strong progress in the third quarter, and Upstart stock soared 53% after the report.
You can already see where this is going. A 53% increase is incredible for shareholders, but is it too good to be true? That kind of eye-popping jump has an undercurrent of caution. And if you have been following Upstart stock, you know that this isn’t an anomaly. Let’s see why the market is excited and how investors should act on Upstart stock.
More than low interest rates
The third-quarter results were better than expected across the board. Revenue increased 20% year over year, a sorely needed shot in the arm to what have been flagging sales for several years already. Revenue of $162 million was well ahead of guidance for $150 million.
Adjusted loss per share was $0.06, way ahead of Wall Street’s expectations for $0.15, and a net loss of $6.8 million was markedly improved from $40.3 million last year. Adjusted earnings before interest, taxes, deprecation, and amortization (EBITDA) turned positive in the quarter, and management expects it to stay positive and keep growing.
Management repeated several times on the earnings call that the success was due to internal system improvements and not newly low interest rates, which didn’t even start going into effect until the very end of the quarter. CEO Dave Girouard explained that Upstart has been rigorously upgrading its machine learning systems, leading to efficiency improvements, cost savings, and a better, higher-converting platform. The impact of low interest rates should be another tailwind for the company, but management was eager to attribute its performance to company changes that are kicking in.
As the platform gets better and the climate becomes more hospitable to Upstart’s product, the future looks bright. Upstart has already added 24 new lending partners this year, and it has continued to grow the network throughout the difficult operating environment. It’s seeing an uptick in auto loans, which increased 46% year over year in the third quarter, and it signed a new agreement to fund $2 billion of loans over the next 18 months.
Its new home equity loan of credit (HELOC) product is performing extremely well. It has originated 600 HELOCs since inception without any defaults, and its HELOC coverage extends to 55% of the population.
Should you get on the roller coaster?
Historically, Upstart’s performance has been intricately tied to the economic environment. Its history doesn’t go back very far since Upstart’s time as a public company has yet to hit four years. It went public in a low-rate environment and demonstrated the kind of performance growth investors dream of, with triple-digit growth, increasing profits, and a disruptive business that could change how creditors approve loans. The stock came on the scene at the height of a robust bull market, and Upstart stock reached astronomical valuations. Then, it plummeted as soon as the good times came to an end.
Since then, Upstart stock has been through unusual volatility, soaring and plunging on bits of good and bad news. Hence, the 53% gain off a good report. However, it’s still 80% off of its highs.
Investors are excited about the potential now that interest rates should become a tailwind instead of a headwind. The job market is strong, inflation is cooling, and the economy looks like it’s in a good place. Lower interest rates combined with a booming economy could create the ideal conditions in which Upstart has thrived.
What should new investors do? Right now, Upstart stock is only for investors who have a strong appetite for risk. Even if that’s you, you probably shouldn’t make this a large position in your portfolio. At the current price, Upstart stock trades at a price-to-sales ratio of 12, which is very high compared to companies that are growing much faster. It has lots of growth built into the price, and it means that at any hint of pressure, the stock could fall right back down. Roughly a third of covering Wall Street analysts rate Upstart stock a sell at this price.
Even risk-tolerant investors should only buy if they’re confident in Upstart’s long-term prospects. There may be a lot of choppiness on its journey, and investors should be prepared to hold through volatility.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.