What happened
Shares of Upstart Holdings (UPST 2.06%) fell 28% in January, according to data provided by S&P Global Market Intelligence. This was far worse than the 5% decline from the S&P 500. In short, stocks with high valuations like Upstart are getting a haircut and investors are lowering their near-term expectations.
So what
Upstart partners with banks and credit unions in an attempt to bring artificial intelligence (AI) to the lending process. If successful, the company hopes it can lower costs for consumers while simultaneously increasing profits for lenders due to a decrease in defaults.
Image source: Getty Images.
AI benefits from having access to large datasets. Therefore, every time Upstart gains a new partner, its competitive advantage theoretically gets stronger. For this reason, it was good to see the company announce partnerships with AgFed Credit Union and Corning Credit Union in January. These are smaller credit unions; however, these partnerships still serve to enhance Upstart's dataset.
Despite these positive developments, Piper Sandler analyst Arvind Ramnani lowered the price target for Upstart stock from $300 per share to $223 per share, according to The Fly. This had a small negative impact on the stock.
For context, Ramnani originally gave Upstart its $300-per-share price target in September, just before the stock hit its all-time high. And Ramnani maintained this price target when Upstart reported third-quarter results in November. However, now that the stock is falling, the price target is being lowered.
Lowering price targets when stocks are falling is actually a prevalent practice on Wall Street and Ramnani wasn't the only one to lower their price target for Upstart in January. But it's a good reminder that sentiment can change in the short term even when nothing changes with the underlying business.
Now what
Upstart will report financial results for the fourth quarter of 2021 on Feb. 15. Previously, management guided for Q4 revenue of $255 million to $265 million and net income of $16 million to $20 million. For perspective, at the midpoint of these ranges, this would represent year-over-year growth of 200% on the top line and 1,700% on the bottom line.
Last quarter, Upstart management noted shifts in consumer behavior -- savings rates are falling and credit card balances are rising, which could lead to an increase in defaults in general. There's no doubt Upstart experienced blockbuster growth and adoption in 2021. In 2022, however, it looks like its AI will be put to the test -- if default rates generally rise, did Upstart's AI do a good job in vetting loans?
I anticipate the growth rates to be robust and the headlines to be flashy when Upstart reports Q4 results. But as much as possible, investors need to evaluate whether the software is getting better or worse over time. That's more fundamental to the long-term success of the business.
