Upstart Holdings’ big plunge made it cheap, but there’s a catch

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  • Despite the huge drop in its price, you still think upstart holding (UPST) Steal at today’s prices.
  • However, there is a caveat. An AI-based underwriting model for a fintech company could go bad in an economic downturn.
  • Even if you think the market has overreacted to recent earnings, you may want to take your time.

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Even with technical stock (as measured by Nasdaq Composite) is down 27.6% from its high mark, and admittedly bargains in this sector are hard to find. Many names have become cheaper, but at the same time they remain expensive. At first glance, this does not appear to be the case with upstart holding (NASDAQ:UPST) stock.
Yes, the fintech company, which has changed the game by lending through its artificial intelligence (AI) underwriting model, has not only been dented by market volatility. The company’s recent release of disappointing guidance was the main driver of the latest big double-digit drop.
However, you might think the market has overreacted. However, there is another risk that the stock may not be fully priced in. This would be the risk of an economic downturn, which could severely affect its business. Keep this factor in mind before you decide to contrast this “future of lending” game.

UPST Upstart Holdings, Inc. USD 28.01

UPST stock is cheap for a reason

2021 was a big year for Upstart Holdings. It was able to significantly increase the number of lending institutions using its platform. This resulted in a 252% increase in total revenue, and a much bigger jump in profitability.
But as we saw in our latest earnings report and induction update, this time of operating performance won’t repeat itself in 2022. Lowering revenue estimates to $1.25 billion, down from $1.4 billion, growth is slowing much more quickly than previously forecast.
That’s why, despite hitting revenue and earnings for the quarter, UPST stock is down after its latest updates. Again, you would think that his bottom line after earnings drop of more than 56% was an overreaction. According to estimates compiled by the Wall Street Journal, the consensus of analysts calls for it to earn $1.91 per share this year, $2.66 per share in 2023, and $4.30 per share in 2024.
Not bad for stocks today trading at around $33 per share. Then again, as the saying goes, “There is no such thing as a free lunch.” Just as you can’t get something for nothing, you can’t achieve high growth at a low price and limited risk. As already mentioned, there is another danger that may lead to this promising “newbie” facing a sharp reversal of wealth.

Can a “disruptive” start-up lending model withstand an economic downturn?

The term “disabled” may be cliched, but it’s a subtle point to use when discussing the fintech lending model. So far, Upstart has been able to demonstrate that an AI-based alternative to traditional loan underwriting methods leads to greater approval rates and lower default rates (in the aggregate).
That’s why I was able to see such widespread adoption in a short period of time. However, the banking world probably very quickly assumed that this company had made a better mousetrap. At least, that’s David Chiaverini’s view from Wedbush. For several months, the analyst argued that his platform had yet to be tested during the recession.

With payments rising, and recession risks rising, this is a huge potential problem with an upstart. Its platform’s reputation as a better risk assessor could collapse. In turn, the demand from its lending partners hurts.
Already rated the stock “sell” before the disappointing earnings loss, Chiaverini has since lowered his target price again, from $70 to $35 per share. He can lower his target price if his bearish thesis starts to emerge.

After the Big Drop, “Wait and See” is the best move

Simply put, the market has done nothing wrong in pushing this stock to its current valuation. Combined with slower-than-expected growth, there are significant downside risks if there is an economic downturn. Today’s assessment accurately discounts potential future outcomes.
Also, keep in mind something else. A full return to past highs ($401.49 per share) is unlikely. With interest rates rising, stock market valuations will not reach the levels last seen in a near-zero interest rate environment in 2021. However, even a partial recovery could mean significant gains over today’s trading price, assuming it emerges from a potential downside and is able to meet Earnings expectations or exceeded.
However, while the potential for an upside may seem high, so is the risk. You may want to take your time before buying UPST stock.
At the date of publication, Thomas Neale has not (directly or indirectly) held any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, and are subject to InvestorPlace.com’s posting guidelines.

The big plunge into post-Upstart Holdings has made it cheap, but there’s a catch that first appeared on InvestorPlace.

The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

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