Analysis

Why Upstart Dropped 16% in October

Shares of Upstart Holdings (UPST -4.11%) stock sank 16% in October according to data provided by S&P Global Market Intelligence. The artificial intelligence (AI) consumer lending stock has been plagued by plunging sales and high losses, and investors are gearing up for an update.

One of the most volatile stocks on the market

It’s been a rough two years for Upstart. The lending platform, which uses an AI-based model to assess credit risk, has been crushed under the weight of increased interest rates. Not only are fewer people looking for loans when interest rates are the highest they’ve been in years, making it challenging for borrowers to take a loan and make their payments, but Upstart’s system also approves fewer loans for the same reason — there is naturally a higher risk of default under these circumstances.

Over the past few quarters, sales have plunged and net losses have expanded. However, Upstart’s stock soared earlier this year when the company provided an update that it had secured $2 billion in long-term funding for its loans. Investors are looking toward the future, and this means Upstart is well positioned to stay alive and bounce back, and it could in a big way. At the current price, it could be considered a bargain when measured against future opportunities.

However, over the past few months, performance has continued to be dismal. An early-2023 market rally came to a halt as the Federal Reserve is keeping interest rates high, and inflation has yet to be tamped down. Upstart’s current prospects, at least, have looked less compelling, and the current price-to-sales ratio of 4.6 isn’t very attractive.

Is now the right time to buy Upstart stock?

In the days leading up to the third-quarter earnings report, which is scheduled to be released tomorrow, Upstart stock has taken a swing back up. Enthusiastic, or maybe risk-loving, investors have sent the stock up 35% since the start of November.

I may not agree with that optimistic take, but I’m also not surprised, since Upstart stock tends to attract these kinds of investors and this kind of movement. If the report is better than expected, the price could jump even higher.

Upstart stock is up 129% year to date, and that already takes into account so much progress. If the price keeps soaring, I’d be very cautious about investing in Upstart. There’s already been plenty of volatility, and the price could sink fast with a negative report tomorrow, or at any other time, as investors recognize that the forward-looking opportunity doesn’t necessarily support the gains right now.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.

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