Why Is Upstart Stock 35% Off Its Recent Highs?

Shares of Upstart Holdings (Nasdaq: UPST), which operates an AI-powered lending platform, jumped after the company shared its fourth-quarter earnings on March 17, and it’s been a rollercoaster since.

The day Upstart released earnings, its stock closed at $60.79. By the end of the next trading day, the share price had ballooned to $115.09 (good enough for a one day gain of 89%). By March 22, shares rose again to reach $164.87, but they’ve been whipsawing since.

Upstart’s stock is frequently experiencing one-day swings of more than 5%. The shares are now 35% off their recent highs. Let’s take a look at what’s causing the volatility. 

Why Upstart (UPST) Earnings Beat Forecasts

The volatility is largely because of Upstart’s fourth-quarter earnings. Key points include:

  • Quarterly revenue rose 39% year over year, to $86.7 million, while adjusted net income declined 30% year over year, to $5.4 million — but remained positive.
  • Full-year 2020 revenue increased 42% year over year, to $233.4 million. Adjusted net income shot up 430%, to $17.5 million, in fiscal 2020.
  • As for guidance, the company predicts first-quarter revenue of $118 million, adjusted net income in the range of $13.4 million to $14.2 million, and adjusted EBITDA of $14.6 million to $15.3 million.
  • For 2021, the full-year guidance anticipates roughly $500 million in total revenue (about 114% higher year over year), and a 10% adjusted EBITDA margin.

It’s that last point that really caught Wall Street’s attention. An acceleration from 42% revenue growth in 2020 to forecast growth of 114% in 2021 shows that Upstart could be at a pivotal inflection point. 

That’s important because the market the company serves is massive. Upstart is attempting to use artificial intelligence to improve the quality of loans for both consumers and lenders, creating efficient match-ups meeting clients’ needs while theoretically cutting down on the number of defaults.

In this, it resembles Clover Health Investments (NASDAQ: CLOV), which also plays both ends of its market by simultaneously offering medical insurance and managing healthcare data for doctors to improve overall efficiency, once again using an AI platform.

Investors also responded favorably to Upstart’s acquisition of Prodigy Software, expected to close in the second quarter, which would expand the company’s portfolio from personal loans to auto loans as well. Upstart’s earnings presentation said that Prodigy’s software platform has facilitated $2 billion in car loans overall. Upstart CEO Dave Girouard said automotive retail is “among the largest buy-now-pay-later opportunities, and together with Prodigy, we aim to help dealers create a seamless […] experience worthy of 2021.”

Upstart’s Volatility Is Driven in Part by a Secondary Offering

Upstart’s powerful stock market performance in late March and early April resulted from good Q4 and full-year revenue gains, outstanding guidance, and its upcoming acquisition of Prodigy, followed by entry into the $626 billion per year auto financing market.

So why has the stock experienced an accelerating decline in April that leaves it well below recent levels?

At least part of the answer lies in the company’s April 9 secondary offering of 2.3 million shares at $120 apiece. Despite being much smaller than its 10.8 million share IPO, the offering will raise about double the amount of Upstart’s IPO at $250 million. The cooldown in stock prices likely resulted both from worries about share dilution and concerns regarding overvaluation, given that Upstart was trading at more than 20 times its forward earnings.

On the other hand, Upstart’s metrics are positive whereas many of its fintech rivals are currently operating at a loss — and this could have contributed to the rising stock price in recent days. The company seems to be successfully appealing to both small and large banks, as well as to customers, and has plenty of room to expand. The beginning of that expansion is coming soon with its Prodigy acquisition and entry into the auto loan arena.

As its name implies, Upstart is trying to disrupt a market, and a massive one at that. Its guidance for 2021 gives investors more confidence that the company is making progress, but it’s also not uncommon for companies with robust gains to experience volatility in the share price as investors struggle to price in risks against a company’s upside. 

If you own shares of Upstart, you should expect them to be among your more volatile holdings. If you’re confident in the company’s long-term opportunity, you’ll have opportunities like today to buy more when the price dips.

With Upstart already demonstrating profitability and issuing guidance that points toward an inflection point in 2021,it’s one of the more compelling fintech opportunities in today’s market — if you have the stomach to handle its ups and downs.

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Rhian Hunt has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Upstart Holdings, Inc. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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