San Mateo, Calif.-based Upstart Holdings, Inc. (UPST) operates a cloud-based artificial intelligence (AI) lending platform that aggregates consumer demand for loans and connects it to its network of AI-enabled bank partners. The stock has garnered significant investor attention so far this year. UPST shares have rallied 473.7% in price year-to-date on the back of substantial earnings growth. However, the stock slumped 18% on November 10 after the company reported its third-quarter results. Over the past month, UPST has lost 39.5% in price to close yesterday’s trading session at $236.01. It is currently trading above its 200-day moving average but below its 50-day moving average.

UPST failed to impress investors despite reporting substantial year-over-year growth in revenues and earnings that beat analyst estimates. Piper Sandler’s Arvind Ramnani accredited the stock’s selloff primarily to “elevated investor expectations and lack of quantification of its auto opportunity.”

In addition, the stock is currently trading at a lofty valuation. In terms of forward P/E, UPST is currently trading at 229.76x, which is 1,915.1% higher than the 11.40x industry average. Also, its 31.25 forward Price/Book ratio is 2,331.4% higher than the 1.29 industry average. And UPST’s 11.18x trailing-12-months PEG is 5,460.5% higher than the 0.20x industry average. Citing the lofty valuation, John Hecht of Jefferies Group LLC downgraded Upstart to Hold.

Click here to check out our Cloud Computing Industry Report for 2021

Here is what could shape UPST’s performance in the near term:

Mixed Profitability

UPST’s 16.37x EBITDA margin is 30.3% lower than the 23.47% industry average. Also, its 12.14% net income margin  is 59.8% lower than the 30.22% industry average.

However, UPST’s 21.30%, 4.83%, and 7.40% respective ROE, ROA, and ROTC compare with the 12.84%, 1.35%, and 6.02% industry averages.

Solid Third-Quarter Earnings Report

UPST’s total revenues increased 249.5% year-over-year to $228.45 million in its fiscal third quarter, ended September 30. Income from operations stood at $28.60 million, up 134.3% from the same period last year. And its adjusted net income grew 367.7% from its year-ago value to $57.47 million. The company’s adjusted EPS increased 275% year-over-year to $0.60, topping the 0.33 consensus estimate by 81.8%. In addition, its adjusted EBITDA increased 282.6% year-over-year to $59.14 million.

Promising Analysts Estimates

Analysts expect UPST’s revenues to increase 203.8% year-over-year to $263.39 million in the current quarter. Furthermore, its revenue is expected to increase 245.8% in the current year and 41.5% in the following year.

On the other hand, the company’s EPS is expected to grow 752.2% in the current year and 17.9% in the following year. The Street expects UPST’s EPS to come in at $0.48 in the current quarter, indicating a 585.7% rise from the same period last year. Also, the company’s EPS is expected to grow 89.1% per annum over the next five years.

POWR Ratings Reflect Uncertain Prospects

UPST has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Value, consistent with its stretched valuation.

UPST has a C grade for Quality. The company’s mixed profitability justifies this grade.

Of the 143 stocks in the Financial Services (Enterprise) industry, UPST is ranked #83.

Beyond what I have stated above, one can also view UPST’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the Financial Services (Enterprise) industry here.

Bottom Line

Financial technology solutions have gained immense popularity over the past year due to the pandemic-led remote lifestyle. UPST’s business strength and the industry tailwinds should help the company grow. However, the stock looks overvalued at its current price. Also, with a beta of 1.22, the stock seems to be volatile. So, we think it could be wise to wait for a better entry point in the stock.

How Does Upstart Holdings, Inc. (UPST) Stack Up Against its Peers?

While UPST has an overall POWR Rating of C, one might want to consider looking at its industry peers, Forrester Research, Inc. (FORR), Donnelley Financial Solutions, Inc. (DFIN), and Santander Consumer USA Holdings Inc. (SC), which have an A (Strong Buy) rating.

Click here to check out our Cloud Computing Industry Report for 2021

UPST shares fell $2.01 (-0.85%) in premarket trading Wednesday. Year-to-date, UPST has gained 479.17%, versus a 26.74% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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