Upstart Stock Down 92% but Price Weakness Presents Contrarian Opportunity

UPST Stock Set to Benefit From Growth of Digital Lending Sector

It seems like only yesterday that we were going in person to banks for loans, but the trend over the past few years has been toward digital lending, meaning people have increasingly been letting financial platforms search for the best loans.

One study estimates that the digital lending market in the U.S. will grow at a compound annual growth rate (CAGR) of 11.4% from 2021 to 2026. (Source: “United States Digital Lending Market,” Mordor Intelligence, last accessed August 22, 2022.)

One digital lending stock with above-average price appreciation potential is Upstart Holdings Inc (NASDAQ:UPST). Upstart stock is currently trading above its initial public offering (IPO) price of $20.00 but significantly below its euphoric high of $401.49, set in October 2021, which was clearly excessive.

Upstart Holdings’ lending platform applies artificial intelligence in providing loans to applicants based on various risk metrics. The platform provides the best loans to applicants without them leaving their homes. (Source: “About,” Upstart Holdings Inc, last accessed August 22, 2022.)

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Based on current trends, digital lending has become the norm. Despite that, UPST stock is down by a whopping 92% from its record high, including being down by 79% in 2022. While the initial surge was unwarranted, the scale of the subsequent selling of Upstart stock means an opportunity presents itself to contrarian investors.

Chart courtesy of StockCharts.com

Upstart Holdings Inc’s Revenues Moving Toward $1 Billion

Upstart Holdings delivered explosive revenue growth from 2018 to 2021, ranging from high-double-digit to triple-digit percentages. The company’s revenue-growth CAGR was an impressive 96.4% during this period.

Fiscal YearRevenues (Millions)Growth
2017$57.3N/A
2018$99.373.4%
2019$164.265.3%
2020$233.442.2%
2021$848.6263.6%

(Source: “Upstart Holdings Inc.” MarketWatch, last accessed August 22, 2022.)

But as is generally the case with companies that rapidly ramp up their revenues, the growth rate eventually tends to move toward normalization.

Look for Upstart to grow its revenues by 5.7% to $896.9 million this year and 6.7% to $956.9 million in 2023. This implies a reasonable forward multiple of 2.6 times the company’s consensus 2023 revenue estimate. (Source: “Upstart Holdings, Inc. (UPST),” Yahoo! Finance, last accessed August 22, 2022.)

The risk facing Upstart Holdings Inc is the negative impact of rising interest rates on the demand for loans. This is reflected in the company’s softer expected revenue growth rates. My view is that the higher interest rates and potential recession will hurt, but adopting a longer-term view could pay off for investors.

Analyst Take

Strong expected tailwinds in the digital lending sector should power the share price of Upstart Holdings Inc higher in the longer term.

Institutional ownership of UPST stock is broad, with 508 institutions holding a 47% stake, but the market has been betting against Upstart Holdings Inc. This is reflected by the current short position of 25.8 million shares, representing 35% of the float. (Source: Ibid.)

While the short traders have put downward pressure on the price of Upstart stock, a reversal to the upside would likely drive those traders to cover their positions and lift the share price.