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Why Shares of Upstart Holdings Rallied 36% in May

By Brett Schafer - Jun 6, 2021 at 9:49PM

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The disruptive lending platform had knockout earnings and raised revenue guidance for 2021.

What happened

Upstart Holdings (UPST -1.11%) stock rose 36% in May, according to data provided by S&P Global Market Intelligence. These rapid gains came because the company beat analyst earnings estimates in the first quarter and significantly raised its outlook for the 2021 fiscal year.

So what

Based in San Mateo, California, and founded by ex-employees of Alphabet's Google (GOOG 1.14%) (GOOGL 1.11%), Upstart is a lending platform that uses artificial intelligence to estimate what it calls "true risk" for anyone taking out a consumer loan. It works with financial institutions, essentially acting as the technology middleman between people buying and selling loans to one another.

Two hands hovering over a crystal ball that is lighting up.

Image source: Getty Images.

On May 11, Upstart released its financial results for the first quarter of 2021. Revenue grew 90% in Q1 to $121 million, while non-GAAP (adjusted) earnings per share (EPS) were $0.22 for the quarter, beating the $0.15 consensus analyst estimates. Management also provided its second-quarter 2021 financial outlook, guiding for $150 million to $160 million. Lastly, it raised its full-year revenue guidance from $500 million to $600 million.

This big step up in 2021 revenue expectations was likely the main reason Upstart stock soared after the earnings report. It also caused analysts at Citigroup, Jefferies, and Piper Sandler to all raise their price targets on the stock. This torrid revenue growth shows the strong value proposition Upstart's platform has for its financial partners and individual consumers as it tries to take market share from the $1.5 trillion consumer loan market.

Now what

Investors in Upstart have done well since its IPO late last year, with shares up over 450% in that short time frame. However, with those gains comes an increasingly high valuation. The stock trades at a forward price-to-sales ratio (P/S) of around 18.8, and a forward price-to-earnings ratio (P/E) of 238 based on analyst estimates for 2021. Upstart is growing quickly and continues to blow all expectations out of the water, so this high valuation should come down quickly, but there's no getting around how expensive the stock is right now.

There's seems to be no reason to sell your shares in Upstart. The business is firing on all cylinders and continues to impress. But if you're planning on starting a position after this latest earnings report, it could be smart to be patient and slowly buy shares over time, reducing the impact short-term volatility could have on your investment.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Brett Schafer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Jefferies Financial Group Inc., and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
$121.03 (1.11%) $1.33
Alphabet Inc. Stock Quote
Alphabet Inc.
$122.03 (1.14%) $1.38
Upstart Holdings, Inc. Stock Quote
Upstart Holdings, Inc.
$33.13 (-1.11%) $0.37

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