Shares of Upstart Holdings (Nasdaq: UPST), which operates an AI-powered lending platform, jumped after the company shared its fourth-quarter earnings on March 17, and it’s been a roller coaster ride ever since.
On the day Upstart posted profits, its stock closed at $ 60.79. By the end of the next trading day, the share price had risen to $ 115.09 (good enough for a daily gain of 89%). By March 22, stocks rose again to $ 164.87, but have been whipping since then.
Upstart shares often fluctuate by more than 5% over one day. The stocks are now 35% below their recent highs. Let’s take a look at what is causing the volatility.
Why Upstart (UPST) Results Beat Forecast
The volatility is mainly due to Upstart’s fourth quarter result. Important points are:
- Quarterly revenue rose 39% year over year to $ 86.7 million, while Adjusted Net Income declined 30% year over year to $ 5.4 million – but remained positive.
- Revenue for the full year 2020 increased 42% year over year to $ 233.4 million. Adjusted net income increased 430% to $ 17.5 million in fiscal 2020.
- For the first quarter, the company forecasts revenue of $ 118 million, adjusted net income in the range of $ 13.4 million to $ 14.2 million, and adjusted EBITDA of $ 14.6 million to $ 15.3 million . USD.
- For the year 2021, the forecast for the full year expects total sales of around USD 500 million (approx. 114% higher than in the previous year) and an adjusted EBITDA margin of 10%.
It’s the last point Really caught the attention of Wall Street. An acceleration from 42% sales growth in 2020 to projected growth of 114% in 2021 shows that Upstart could be at a crucial turning point.
This is important because the market the company serves is huge. Upstart tries to use artificial intelligence to improve the quality of credit for both consumers and lenders in order to achieve efficient matches that meet customer needs and theoretically reduce the number of defaults.
In that it is similar Clover Health Investments (NASDAQ: CLOV), which also plays both ends of its market by simultaneously offering health insurance and managing health data for doctors to improve overall efficiency, again using an AI platform.
Investors also reacted positively to Upstart’s acquisition of Prodigy Software, which is expected to close in the second quarter and would expand the company’s portfolio from personal loans to auto loans. Upstart’s results presentation stated that Prodigy’s software platform enabled $ 2 billion in total auto loans. Dave Girouard, CEO of Upstart, said automotive retail is “one of the greatest ways to buy now and pay later, and together with Prodigy we want to help dealers create a seamless environment […] Experience worthy of 2021. “
Upstart’s volatility is determined in part by a secondary offering
Upstart’s strong performance in the stock markets in late March and early April resulted from good sales growth in the fourth quarter and full year, excellent forecasts and the upcoming acquisition of Prodigy, followed by entry into the auto finance market of $ 626 billion per year.
Why did the stock see an accelerated decline in April that is well below recent levels?
At least part of the answer lies in the company’s April 9 secondary offering of 2.3 million shares priced at $ 120 each. While the offering is much smaller than the 10.8 million shares initial public offering, it will increase double the amount of Upstart’s initial public offering to $ 250 million. The cooldown in stock prices was likely due to both stock dilution concerns and overvaluation concerns as Upstart was trading at more than 20x its futures earnings.
On the flip side, Upstart’s metrics are positive while many of its fintech competitors are currently operating at a loss – and this may have contributed to the share price soaring over the past few days. The company seems to appeal to both small and large banks and customers successfully, and has plenty of room for expansion. The start of this expansion comes soon with the acquisition of Prodigy and entry into the auto loan arena.
As the name suggests, Upstart is trying to disrupt one market, and a massive one at that. The 2021 outlook gives investors more confidence in the company’s progress, but it’s also not uncommon for companies with robust earnings to experience stock price volatility as investors struggle to assess the risks against a company’s uptrend.
If you own shares in Upstart, you should expect them to be among your more volatile holdings. Like today, if you believe in the company’s long-term opportunity, you have the option to buy more if the price goes down.
With Upstart already demonstrating profitability and issuing guidelines pointing to a tipping point in 2021, this is one of the most compelling fintech opportunities out there – if you have the stomach to deal with the ups and downs.
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