Upstart Stock Down 10% in February – Time to Buy UPST Stock?

The price of Upstart stock is down 10% so far this month as concerns about an upcoming economic downturn in the United States and a corresponding spike in delinquency rates weighed on the valuation of this fintech stock.

On 21 January, analysts from Wedbush lowered their price target for UPST to $110, down from a previous forecast of $160 per share. The firm reiterated its Neutral rating for Upstart citing increasing delinquencies as a potential headwind to the company’s top-line performance.

Analysts identified a spike in vintage delinquency rates for all loans granted in 2021, with the rate moving from 2.44% to 2.57%.

The firm emphasized that investment returns could be affected by higher delinquencies, however, Wedbush still expects that Upstart will report strong revenue growth in 2022 despite this development.

“[For Upstart] the true test will be if Upstart’s underwriting model withstands an economic downturn with better-than-expected losses, and if achieved, this could set the stage for the company to make significant strides in gaining market share”, stated the financial services firm in the note that accompanied its price target revision.

UPST stock went down more than 13% back when the report came out and the stock went on to drift to as low as $75 per share as the market’s sentiment toward growth stocks continue to be negative.

In the past three days, the stock has declined as well following a spike in US Treasury Yields. The current yield of the US 10-year Treasury Note rose from around 1.78% to 1.94% during this period as expectations of a shift in the country’s monetary policies keep weighing.

For risky equities such as Upstart, the continuous climb of US Treasury yields is not good news as this increases the risk premium demanded by investors. This, in turn, depresses the valuation of the firm.

Upstart announced last month that it will be reporting its financial results covering the fourth quarter of the 2021 fiscal year on 15 February and market participants will be paying attention to the management’s comments about the overall macro environment to identify the appearance of potential short to mid-term headwinds that can affect the firm’s performance throughout the year.

What could be expected from this stock in the near future? In this article, I’ll be assessing the price action and fundamentals of UPST stock to outline plausible scenarios for it.

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Upstart Stock – Technical Analysis

A break below the $110 level back in January signaled that the decline in Upstart stock could accelerate in the following days. Moreover, a failed break above this threshold on the back of a temporary breather in the latest bond market sell-off is favoring this view as well as there’s not enough conviction to fully reverse the current trend.

The latest spike in US Treasury yields is quite negative with the 10-year yield still standing this morning above 1.9%. For Upstart, subsequent increases in this important bond-market benchmark could lead to further drops as it would indicate the continuation of the current risk-off mode.

Next week’s earnings report could end up confirming a bearish outlook if the price of UPST stock declines below the $80 level. In that case, the downside risk would increase significantly as market participants may aim to close the March 2021 open gap – pushing the stock price to around $60 per share.

Given the market’s overall pessimistic attitude toward growth stocks, even if Upstart delivers better-than-expected numbers, the reaction may not be positive as investors will be more focused on what will happen in the future.

That said, momentum indicators are possibly signaling that a near-term bottom could be around the corner with the Relative Strength Index (RSI) posting no lower lows in the past few weeks while the MACD has been on an uptrend since late November 2021 despite the price collapsing to its current levels.

Upstart Stock – Fundamental Analysis

Upstart has surprised analysts in the past fourth quarters at least by beating estimates for both revenues and earnings.

For the fourth quarter, the consensus revenue forecast for the firm stands at $262.9 million resulting in a 203% year-on-year jump while the market’s consensus adjusted EPS forecast stands at $0.51 resulting in a 625% increase compared to Q4 2020.

In the past 12 months, the firm produced $243 million in free cash flows on sales of $598 million. This results in an FCF margin of 41% for the financial services company.

This percentage makes Upstart a potential cash cow. Based on the market’s 2022 revenue forecast, Upstart could produce around $480 million in free cash flows.

At its current market capitalization of $8 billion, the firm is being valued at only 17x that figure and this makes it a highly attractive growth stock.

Therefore, even though it seems plausible that the stock price could continue to decline in the following months due to some temporary headwinds, the business model and the firm’s cash-flow generation capacity are quite robust and make the valuation very appealing at the moment for long-term investors.

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