Upstart Holdings jumps over 45% after Q2 earnings beat estimates, Citi upgrade: Should you buy?

Following an impressive second-quarter earnings report, Upstart Holdings Inc (NASDAQ: UPST) has witnessed a significant shift in analyst perceptions.

Notably, Citi upgraded the company from ‘Sell/High Risk’ to ‘Neutral/High Risk,’ simultaneously raising their price target from $15 to $33.

This adjustment reflects an improved outlook based on several factors including an enhanced conversion ratio and reduced impact from macroeconomic variables on credit losses.

Meanwhile, Piper Sandler maintained a ‘Neutral’ rating but raised their price target to $31 from $28, suggesting a cautious yet optimistic view of Upstart’s near-term prospects.

Upstart stock surges post Q2 earnings

The positive adjustments in analyst ratings closely followed the announcement of Q2 results, propelling a dramatic surge in Upstart’s stock price.

Initially, shares soared over 25% at market opening and have continued to climb, currently trading up over 45%.

Q2 Earnings Overview

Upstart reported a Q2 Non-GAAP EPS of -$0.17, surpassing expectations by $0.22, with a revenue of $128 million, which also exceeded forecasts by $3.47 million.

Despite a year-over-year decline in revenue by 5.7%, these results indicate a significant improvement over anticipated figures.

The company achieved a transaction volume with 143,900 loans originating, showing a robust conversion rate of 15%, which marks a substantial increase from the previous year’s rate.

The financial results also revealed some challenges, with a net income loss widening to $54.5 million from $28.2 million in the same quarter of the previous year.

However, the operational metrics provide a mixed view; while the income from operations and net income figures were down, the contribution profit stood at $76.1 million with a contribution margin of 58%.

AI advancements and financial outlook

CEO Dave Girouard highlighted significant advances in Upstart’s AI model and operational efficiencies as key drivers behind the quarter’s performance.

The company’s AI-driven lending platform continues to attract and retain lending partners, a crucial aspect of its business model that leverages technology to streamline the personal loan process.

Looking ahead, Upstart provided an optimistic financial outlook for Q3, projecting revenues of around $150 million against a consensus of $135.33 million.

This projection is supported by anticipated revenue from fees and an expected positive EBITDA in the fourth quarter, suggesting confidence in sustained revenue growth and potential profitability.

Market and economic implications

The positive outlook and performance come amidst a backdrop of mixed economic indicators and a challenging macroeconomic environment.

The Upstart Macro Index, which estimates macroeconomic impacts on credit losses, alongside commentary from analysts, suggests cautious optimism but highlights the need for sustained positive trends before a more bullish outlook can be confidently established.

Valuation concerns & long-term prospects

Despite the promising outlook, some analysts expressed valuation concerns, particularly highlighting the company’s high EBITDA multiple and substantial debt levels.

Upstart’s focus on integrating AI for more precise risk assessments and better loan terms is a testament to its pioneering role in transforming the lending industry.

However, the ongoing need to manage debt and navigate a fluctuating economic landscape poses significant challenges that could impact its long-term growth trajectory and market position.

Having delved into the intricacies of Upstart’s financial health, market position, and broader economic implications, we now turn to another crucial aspect of our investment analysis.

Let’s shift our focus to the technical charts to decipher the stock’s price trajectory.

This technical examination will complement our fundamental analysis, providing a holistic view of Upstart’s potential as an investment opportunity in the fintech sector.

Upstart became a darling of the stock market immediately following its IPO in December 2020 with its stock surging above $400.

However, that excitement was short-lived as the stock crashed rapidly soon after, losing over 95% of its value by early 2023.

Then it again saw a rapid surge from below $12 to above $70 by August 2023, which was again followed by a crash below $20 soon after. However, since then it has regularly found support near the $20.60 level and resistance above $37.

Strong upward momentum but immediate resistance nearby

As the stock continues its rapid surge today, investors must pay attention to how it behaves around $35.1, which is the 61.8% Fibonacci retracement level from the previous swing low and swing high.

Moreover, they should also take note of how it behaves around its medium-term resistance level above $37.

UPST chart by TradingView

Only if it crosses above these two levels and gives a weekly closing above them can one safely say that the stock has entered a new uptrend and fresh long positions can be initiated.

Traders who continue to have a bearish outlook on the stock have a low-risk entry on their hands right now.

But, be mindful that this entry is a low risk only because the stop loss level at $38.10 is close to where the stock is trading now and it is exhibiting high volatility towards the upside which can be high risk.

 If the stock again faces resistance around $37 and momentum shifts, it can fall to $21 levels in the coming weeks or months where one can book profits.

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