The stock market can be very volatile. Want some proof? Look no further than artificial intelligence lending platform Upstart Holdings (UPST -0.58%). The stock is down about 60% over the past six months, even after gaining over 30% just the last week.
I wouldn't blame anyone for taking profits on any investment that moves 30% higher in a week, but it might pay even better to think like a long-term investor. After the company's barn burner of a fourth quarter, Upstart seems poised to outperform over the quarters to come. Here's why this red-hot stock is still a smart buy today.
Upstart Auto is hitting the gas
Roughly a year ago, Upstart announced its acquisition of automotive retail software company Prodigy. Upstart took Prodigy's software and married it to its in-house lending software to create an integrated product for dealerships to configure, sell, and finance automotive transactions all in one place. Upstart launched the software under the name Upstart Auto.
Image source: Getty Images.
There's a lot for investors to like about Upstart Auto. First, the automotive market is rapidly adopting the software. There are 410 dealerships using it as of the fourth quarter, nearly quadruple the amount from the prior-year period and up 41% from the previous quarter. It's also making gains at the original equipment manufacturer (OEM) level with partnerships announced with Volkswagen and Subaru to date.
Management is guiding for automotive loan volume of $1.5 billion in 2022, which is still relatively minor when considering Upstart's total loan volume was $4.1 billion in the fourth quarter alone. However, the company estimates the addressable market opportunity is worth more than $700 billion, much larger than the personal loan market, Upstart's core operation. In other words, Upstart Auto could eventually be more prominent than the existing business.
Upstart has red-hot financials
Upstart grew its revenue 264% in 2021 to $849 million. I wouldn't blame you for assuming such rapid growth must surely mean Upstart is a money-losing business, but the company is profitable.
Its net income totaled $135 million in 2021. That's a net profit margin of 16%. Assuming the company can continue growing its top line at a faster pace than its costs, profits will rise further.
Upstart's strong financials put cash on the balance sheet, about $1.2 billion of it. Management announced a $400 million stock buyback program, which is rare for a growth stock and will only help further grow per-share figures.
The stock is reasonably priced
There has been a lot of good news, so you might think the stock price would reflect that. However, shares are still down almost 70% from their all-time high, showing just how much the broad market's pullback has impacted Upstart and other growth-oriented names.
But it's an opportunity when shares of good companies get hammered, and those patient enough to take advantage often generate outsized long-term investment returns.
You can see in the chart below how much the stock's downfall and the underlying growth of Upstart's business have impacted the valuation. The stock now trades at a price-to-sales ratio of over seven, which seems like a bargain when you consider management is guiding for revenue growth of 64% in 2022 to about $1.4 billion.
On the other hand, Upstart grew net income by more than 2,000% in 2021, yet the stock's forward price-to-earnings ratio is just 55. With the company still in the early stages of its expansion into massive markets and already profitable, Upstart is an attractive stock at these valuations.
Data by YCharts.
Nothing is guaranteed, and Upstart could always fail to execute moving forward. But given the company's recent momentum, it seems the market has failed to appreciate the combination of growth and profitability Upstart offers investors. In a market that has become wary of speculative and unprofitable companies, Upstart remains a compelling investment idea worth considering.
