Any buyer of Upstart Holdings (NASDAQ:UPST) stock should beware, especially if they’re chasing after the stock’s amazing move today. I am neutral on UPST stock as there’s a less favorable risk-to-reward profile after today’s huge rally. Remember, when asset prices go too far too fast, a retracement could happen at any given moment.
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I have a funny feeling that some of today’s new UPST stock traders don’t know what the company actually does. Headquartered in California, Upstart Holdings operates an app-based lending platform. This platform uses artificial intelligence (AI), and as you are surely aware, financial traders have latched on to anything and everything related to AI in 2023.
This isn’t to suggest that Upstart isn’t a good company. The important thing is to ask why UPST stock is moving so quickly and whether it’s justified or overdone. Then, after delving into the details and dismissing the hype and hoopla, investors can make a more informed decision about Upstart.
Upstart Holdings Stock Flies Higher Despite Crumbling Revenue
UPST stock finished 35% higher today, garnering more attention than usual. Most likely, eager traders were responding to Upstart Holdings’ first-quarter 2023 earnings beat. On the other hand, with every piece of good news, there’s a problem that can be detected.
Upstart did beat Wall Street’s forecast of $99.7 million in quarterly revenue by reporting an actual result of $102.9 million. Let’s look at the big picture, though. In the year-earlier quarter, Upstart Holdings generated $310.1 million in revenue, so the Q1-2023 result represents a nearly 67% year-over-year decline.
Turning to the bottom line, analysts called for Upstart to report first-quarter 2023 adjusted diluted EPS of -$0.83, while the actual result was -$0.47. Again, that’s a beat, but should anybody celebrate this? In the year-earlier quarter, Upstart Holdings was firmly in the black with adjusted diluted EPS of $0.61.
In other words, Upstart’s results weren’t as bad as feared, but that doesn’t necessarily mean the company is growing. Upstart Holdings hasn’t been profitable in a while, and cautious investors should watch for the company to hopefully become income-positive before jumping into a hasty trade.
Upbeat Guidance, AI Fever, and a Short Squeeze Moved UPST Stock
Most likely, it wasn’t only Upstart Holdings’ top and bottom-line beats that prompted a huge run-up in UPST stock. There were undoubtedly other factors involved, including Upstart’s optimistic outlook for the current quarter.
Here’s the breakdown. For 2023’s second quarter, Upstart Holdings expects to generate approximately $135 million in revenue versus the $125 million that analysts had called for. It might be dangerous to call this a beat, though, since it’s only the company’s forecast and hasn’t actually happened yet. So now, Upstart has to live up to its ambitious prediction, and a shortfall in Q2 could result in a share-price decline.
Also, for the current quarter, Upstart Holdings guided for an adjusted net loss of around $7 million. This would represent progress toward closing Upstart’s profitability gap, but again, it’s only a prediction.
Finally, we can’t simply ignore the other factors that probably helped to pump up the UPST stock price. Upstart Holdings bills itself as a “leading artificial intelligence (AI) lending marketplace,” and 2023 is shaping up to be the year of AI. Hence, it’s possible that some traders are simply riding the AI bandwagon with Upstart stock.
Additionally, some Upstart Holdings stock short sellers are probably covering their positions. This involves buying shares back after having sold them short, thereby “squeezing” the shorts out of their positions. If this is the case, it’s not a reflection of Upstart’s actual value as a company, so don’t assume that a short squeeze will be sustainable.
Is UPST Stock a Buy, According to Analysts?
Turning to Wall Street, UPST stock comes in as a Moderate Sell based on one Buy, three Holds, and seven Sell ratings assigned in the past three months. The average Upstart Holdings stock price target is $14.39, implying 24.2% downside potential.
If you’re wondering which analyst you should follow if you want to buy and sell UPST stock, the most accurate analyst covering UPST stock (on a one-year timeframe) is David Chiaverini of Wedbush, with an average return of 53.02% per rating and a 100% success rate. See below.
Conclusion: Should You Consider UPST Stock?
As the old saying goes, what goes up must come down. If a combination of AI fever and short covering boosted Upstart Holdings stock temporarily, don’t be too surprised if the shares retrace to the downside soon.
As for Upstart Holdings’ quarterly results, they exceeded analysts’ expectations but don’t necessarily indicate that the company is thriving. Moreover, Upstart will now have to live up to its own optimistic forecasts, which won’t be an easy task. All in all, it’s perfectly fine for careful investors to watch UPST stock from a distance and monitor the company to see if it manages to turn a profit in 2023.
