Why is everyone talking about Upstart shares?

Holdings reached (NASDAQ: UPST) has experienced a roller coaster ride, mostly on the rise, over the past year. Since the start of 2021, Upstart’s stock had risen nearly 670% before the company released its third-quarter results after market close on Tuesday. This is mainly due to the flawless execution of the company since its IPO.

Despite another flawless performance in the third quarter, stocks are down almost 16% since the press release. The likely culprit was the incredible rise in action so far. Due to this irrational movement in the market, now might be a great time to add this lending platform to your portfolio.

Image source: Getty Images.

What went well

Most loan decisions made today are based on Just IsaacThe FICO’s credit score, which Upstart says is often not a fair judgment of creditworthiness. If you’ve already made a mistake or don’t have any credit at all, you may no longer have access to good loan options. Upstart claims it examines thousands of other variables to determine creditworthiness. While its income still comes mainly from a few major partners, its system was quickly adopted by smaller banks seeking to attract customers who have been adversely affected by the credit rating.

It seems to be working – and the last quarter of Upstart was just wonderful. Loans from Upstart decisions reached nearly 363,000, totaling $ 3.13 billion, and increased 348% year over year. Upstart topped revenue and profit estimates, increasing sales 250% to $ 228 million and net profit roughly tripling to $ 29.1 million. The conversion on rate applications – the frequency with which Upstart’s banking partners ended up granting a loan after Upstart made a decision – has dropped from 15% a year ago to 23% today.

The company’s outlook for the fourth quarter was also strong. Upstart forecasts fourth quarter revenue of $ 260 million, up 14% sequentially and 199% from the same period last year. Its forecast for fourth quarter net income is $ 18 million, but its adjusted net income – which excludes stock-based compensation – is $ 52 million. The company also raised its forecast for the full year from $ 750 million to $ 803 million in revenue.

Upstart launched its auto loan service – formerly Prodigy, which it acquired in early 2021 – on October 6, and it has already granted 4,000 auto loans in 47 states. The auto loan market is six times the size of the personal loan market, so this part of Upstart’s business is expected to grow astronomically over the next five years. The downside, however, is that in the short term, contribution margins – the gross margin version of Upstart – will decrease. With the rise of the automobile, the contribution margin of Q3 has fallen from 54% to 46%. And due to continued growth in auto volumes, this is expected to continue.

Why is it down

Upstart’s valuation in earnings was 60 times higher than sales. At that kind of valuation, Wall Street isn’t happy with a solid beat-and-raise quarter. With valuations this high and soaring ahead of earnings, there might not have been any outcome that would have pushed the stock higher. While nothing went wrong this quarter, it makes sense that the market may have needed a break.

However, just because the quarter went well doesn’t mean that there aren’t a lot of risks associated with Upstart. First, Upstart has yet to go through a financial downturn, which is often a milestone for financial companies, especially those that lend. These days, it is easy to lend and it is easier for people to repay their loans. However, when the economy drops, it will be a real test to see how good Upstart’s algorithms are. As long as Upstart’s revenue continues to rise and the company gains more partners, investors should be comfortable knowing its algorithms are correct. After all, if its algorithms are poor, customers will end their relationship with Upstart.

Second, the company has a high concentration of customers. At the end of 2020, one customer represented 67% of the total loan volume. This figure has been steadily declining since, and in the third quarter, this partner represented only 58% of the volume. This is probably due to the fact that Upstart quickly increased its number of customers. Upstart had 31 lending partners in the third quarter, up from 10 the year before. With this kind of partner growth, resulting in more revenue diversification, its largest customer will likely represent less of Upstart’s total volume.

What you should go with

For risk-tolerant investors who can cope with volatility and have not yet added Upstart to their portfolio due to its rapid rise this year the market offers you an opportunity. Despite a breathtaking quarter, the action is falling like a rock. In this case, the market’s decision is quite irrational, and investors who have wanted to add Upstart to their portfolio should see this as an opportune time to buy a high quality business at a discount.

Although the stock has already skyrocketed this year, there is still room for investors to make money over the next five years. Upstart is trying to disrupt $ 750 billion in lending volume, and given it only had $ 3 billion this quarter, the company still has plenty of growth. I believe Upstart is one of the smartest places to invest money today – especially at this discount – and I plan to add to my position before the end of the year.

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Jamie Louko owns shares of Upstart Holdings, Inc. The Motley Fool owns shares and recommends Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.

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

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