Upstart Stock Down 18% Today – Time to Buy UPST Stock?

The price of Upstart stock is down 18% this morning in pre-market stock trading action following the release of the firm’s financial results covering the third quarter of the 2021 fiscal year despite beating analysts’ estimates for both revenues and earnings.

For the three months ended on 30 September, Upstart reported total revenues of $228.45 million resulting in a 250% leap compared to the same period a year ago while also exceeding analysts’ estimates for the quarter by nearly $14 million.

Meanwhile, operating income for the period expanded from $12.2 million in Q3 2020 to $28.6 million during this quarter while net income attributable to stockholders tripled from $9.7 million to $29.1 million resulting in GAAP earnings per share of $0.30 for the company.

On an adjusted basis, earnings per share landed at $0.60 resulting in a sizable improvement compared to the $0.16 per share reported a year ago while nearly doubling the Street’s forecast for the period.

However, in relative terms, the firm’s operating margin declined 500 basis points compared to a year ago at 14% and this resulted in an 800 basis points drop in Upstart’s contribution margin at 46%.

Finally, Q4 revenues are estimated to come in at around $255 and $265 million – exceeding Wall Street’s estimates by over 10% – while contributions margins are forecasted to end the period at 47% or 200 basis points lower than a year ago.

This deterioration in the firm’s bottom-line profitability and operating metrics could be the reason why Upstart stock is dropping today.

Can this result in the beginning of a downtrend for this financial stock? In this article, I’ll attempt to answer that question by assessing the price action and fundamentals of UPST stock.

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Upstart Stock – Technical Analysis

Back in October when I last wrote about Upstart I warned that the market was getting ahead of itself as indicated by the significant distance between the price and the stock’s short-term moving averages.

I highlighted that the risk of a sizable correction was getting too high and that proved to be true as the price declined to its 50-day simple moving average just yesterday resulting in a 22% drop from Upstart’s 52-week high of $401.5 per share.

A bearish divergence in both the Relative Strength Index (RSI) and the MACD first signaled this upcoming decline back then while today’s pre-market drop is pushing Upstart to bear market territory.

Momentum oscillators are overly bearish at the moment with the RSI dropping below 50 – a bearish signal – while the MACD has crossed below the signal line. This cross is being accompanied by elevated negative momentum readings that further favor a bearish outlook for UPST stock.

This pre-market downtick is temporarily finding a floor at the $255 level which coincides with a horizontal support from September this year. A break below this threshold could result in an even more pronounced downtick as bears may eye the $150 bearish price gap left behind in August back when the company unexpectedly swung to profitability.

Downside risks remain quite high at the moment for Upstart stock and those who hold long positions on the stock may have to brace for further pain down the line if the $255 support falters.

Upstart Stock – Fundamental Analysis

The most important factor that appears to be driving the stock price lower today is a significant decline in Upstart’s contribution margin both sequentially and compared to the same period a year ago.

It is also important to note that the percentage of loans that were fully automated – meaning that the firm’s AI technology did most of the heavy lifting – declined from 71% in the previous quarter to 67% and conversion rates also declined 140 basis points to 23% on a quarter-on-quarter basis.

The deterioration of these operating metrics could be anticipating a potential decline in the firm’s latest profit-generation capacity, which is the variable that drove most of the recent uptrend in UPST stock.

As I stated in the previous article, Upstart remains a very attractive growth stock amid its large total addressable market and innovative business model. The company uses artificial intelligence to almost fully automate the approval of loans for consumers.

If today’s pre-market decline spills over to the live session, it would evaporate at least a third of the valuation that the stock displayed back when I last wrote about it. At around $20 billion – the estimated post-earnings market cap – Upstart would be trading at 25 times its forecasted sales for 2021.

Even though this is still a fairly stretched multiple, it is important to note that the firm managed to double its sales this year compared to a year ago after pulling the same stunt last year.

This accelerated growth and the company’s latest positive bottom-line performance justify, to some extent, the elevated price tag assigned to the business.

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