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An opportunity presented itself following the correction in the price of Upstart Holdings (NASDAQ:UPST) after disappointing third quarter results. The artificial intelligence (AI) -based lending platform had been plagued by overvaluation issues weeks before the results were released. Prices had already peaked in mid-October.
That said, it was somewhat surprising that profits pushed it down on November 9. Indeed, Upstart Holdings has exceeded expectations in several important respects. This is a good place to start.
Strong results, but a slowdown
According to Barron’s, it was difficult to understand why UPST’s third quarter earnings were slowing: âAs far as earnings are concerned, it was more the same in the third quarter as the company posted strong growth in earnings. better than expected revenues and forecasts. Upstart (ticker: UPST) reported revenue of $ 228.5 million in the three months to September 30, up 250% from 2020 and ahead of FactSet analyst consensus for $ 215 million. Adjusted earnings per share of $ 0.60 beats estimates by $ 0.33. “
Because Upstart Holdings exceeded those expectations, there was some confusion as to why it should suffer, losing 18% on the news. Some glaring problems probably contributed significantly to the sharp decline. The most obvious, however, is net income – and this is probably a lingering problem for several reasons.
Decrease in earnings for UPST shares
Put simply, Upstart Holdings suffered a drop in net income between the second and third quarters. Net income increased from $ 37 million to $ 29 million during the period. It is obvious and is something investors simply cannot ignore. Given that UPST stock was already overvalued, which prompted the news, it’s no surprise that it fell so dramatically.
Add to that “probable cost increases to maintain growth” in the forecast and you might be wondering why I have called UPST an opportunity now.
I just wanted to say that UPST stocks represent a contrarian opportunity, or a chance to buy the downside. However, I don’t think you should take this opportunity. In fact, there is good reason to believe that prices could fall further soon.
Expectations are not attractive
Yes, Upstart Holdings expects to report a revenue range of between $ 255 million and $ 265 million in the fourth quarter. If that materializes, it will represent a sequential increase in revenue of 12-16%. Normally, this is equivalent to increasing the price.
However, the net result is expected to decline again. The company has given indications that it expects net income of $ 16 million to $ 20 million in the fourth quarter. That’s less than the $ 29 million reported in the third quarter, which itself was a sequential decrease.
So when the company noted âlikely increases in costs to maintain growth,â it actually meant decreased efficiency. The turnover increases again, but in order to maintain this momentum, the company is spending more money.
That’s fine if it results in improved margins – in which case it doesn’t. The number that will be important to follow by the fourth quarter will not be the turnover. On the contrary, net income will be the most important correlation with prices.
UPST stock: what to do
The same Barron article mentioned above also noted that Upstart Holdings said that “the gradual rise now appears to be weaker given the normalization of credit and increasing competition for these loans.”
I have already noted that Upstart Holdings suffered a decline in margins and net income in the third quarter. The company now reports that the growing competition for the loans it targets is intensifying. This will only add increasing downward pressure on margins. Net income could end even lower than the company’s already weak guidance for the fourth quarter.
That is why I do not see any reasonable argument for investing in UPST stocks at this time. In the area of ââloans, margins are of vital importance. Upstart Holdings has a problem there and is unlikely to increase until it reverses that trend. Its AI tech angle might appeal to some investors, but that won’t matter when the aforementioned issues impact the bottom line.
As of the publication date, Alex Sirois does not have (directly or indirectly) any position in any of the titles mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Alex Sirois is an independent contributor to InvestorPlace whose personal equity investing style focuses on long-term, buy and hold stock selections that create wealth. Having worked in multiple industries, from ecommerce to translation to education and using his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
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