What happened
Boy, is the bull market back. Shares of lending platform Upstart Holdings (UPST 2.76%) have soared 21.1% this week, according to data provided by S&P Global Market Intelligence. The stock is now up over 400% year to date (YTD) after a Wall Street analyst lifted their price target on the shares, which likely caused the stock to enter another short squeeze.
However, it is not all sunshine and rainbows for the consumer credit facilitator.
So what
Upstart has benefited this year after the stock collapsed in 2022, likely due to the narrative around the company's artificial intelligence (AI) capabilities. Anything associated with AI has soared so far this year after OpenAI released ChatGPT to the world.
Wall Street has now taken notice, with a BTIG analyst keeping Upstart at a buy rating, raising the price target from $42 to $72, a significant bump. Today, Upstart trades at around $65. This buy call seems to have driven Upstart shares higher and possibly instituted another short squeeze. Around 37% of Upstart's shares are loaned to short sellers -- known as short interest -- making the stock highly volatile and liable to go up quickly if all these short sellers buy back their shares at the same time.
While short squeezes can certainly produce gains in the short run, in the long term, Upstart's stock will be driven by fundamental growth on a per-share basis. The consumer-lending environment seems difficult at the moment, with competitor LendingClub just reporting a revenue decline for the second quarter; it barely squeaked out a positive net margin. If near-term history is any indication, this means that Upstart's results will be much worse when it reports Q2 numbers.
Now what
Today, Upstart trades at a market cap of $5.4 billion. Last quarter, the company's revenue declined 67% year over year to $103 million, with net income coming in at a loss of $129 million. Yikes.
UPST PS Ratio data by YCharts.
Upstart shares trade at a price-to-sales (P/S) ratio of 8.4. Since the stock is unprofitable, an earnings ratio is not applicable, but a P/S over 8 is much steeper than the market average. If you want to own shares of Upstart at these prices, you need to expect the company to grow its revenue at a high rate for many years and achieve strong profit margins.
