Is Upstart Stock a Buy Sell or Hold?

Last year Upstart Holdings (NASDAQ:UPST) saw its valuation soar by 85% in spite of interest rate hikes.

The market expectation of future rate decreases fueled Upstart’s stock with the logic being that these would support demand for AI-based lending. In short, the idea was that borrower quality would rise and default rates would tumble.

Recent investor support drove the stock higher by 19% over the past month alone in spite of concerns that the Federal Reserve will pause interest rate cuts for now.

So with interest rate volatility on the horizon, what does the future look like for Upstart, and will the upward trend persist?

Is Upstart Winning FinTech Market Share?

One area that Upstart has really focused and that’s seen good improvements is the AI model used to automated loan approvals.

The company has also extended its market reach beyond personal loans and now offers home equity lines of credit (HELOCs), a super-prime market segment. The mix and variety of loan offerings means Upstart has reduced exposure to risks from a single loan category.

The financial conditions for the firm appear to be stable, and the company is receiving substantial funding commitments. Participating in a Blue Owl Capital investment agreement enabled the company to obtain a $2 billion commitment fund for consumer loan acquisitions. 

Business Model U-Turn

After a really rocky 2022-23 period, it’s clear that management stepped in to take control of the reins by slashing costs and turning the model around to focus more on fees and less on balance sheet loan funding.

The fruits of management’s efforts have seen the light of day but perhaps the good news has been priced in too severely.Upstart’s market cap now appears elevated, trading at 10x forward sales, which is substantially higher than the sector median of 2.91. This high multiple means any mis-step by the top brass will likely lead to a tumbling share price.

Upstart Top Line Up 20% YoY

In Q3 2024, Upstart saw total revenue increase of 20% year over year to $162 million on the back of 188,149 loans originated, which resulted in $1.6 billion, or an increase of 30% from the prior-year quarter.

Losses from operations came in at $45.2 million versus $43.8 million in the year-ago period. The adjusted net loss came in at $5.3 million or $0.06 per share, a rise from $3.9 million or $0.05 per share in Q3 2023.

Adjusted EBITDA also fell to $1.4 million from $2.3 million in the prior year quarter while contribution margin was reported at 61% compared to 64% in the equivalent year prior period.

While the company is expected to register revenue of approximately $180 million for the upcoming quarter, net interest income is expected to be approximately negative $5 million. Also, adjusted net income is expected to be in the red at approximately negative $5 million.

Is Upstart Stock a Buy, Sell or Hold?

Several analysts have factored Upstart’s current valuation into their ratings following recent, sharp price gains. Investment firm J.P. Morgan modified its rating, moving the lender from ‘Underweight’ to ‘Neutral’.

The substantial growth of Upstart creates vulnerability to short-term market volatility because of high price-to-sales multiples. Most analysts rate Upstart as a ‘Hold’ and that’s supported by a discounted cash flow forecast analysis that puts fair value at $41 per share.

The consensus among analysts of $62 per share suggests material downside risk too so when you put high multiples and so-so cash flows into the mix, it’s hard not to offset the exuberance from seven analysts who upgraded earnings expectations for the next quarter.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.