Valuation is Not an Object for Upstart Stock

By Larry Ramer

How many of us have heard the admonition “money is not an object” from an early age? As rapper Drake put it: “Proof is in the progress, money's not an object.”

Similarly, in the midst of a roaring bull market like this one, valuation is often not an object. Indeed, many high-flying stocks, from Palantir (NASDAQ:PLTR) to Tesla (NASDAQ:TSLA) to Datadog (NASDAQ:DDOG) have forward price-to-earnings ratios of 75x or more.

Upstart’s (UPST) forward price-earnings ratio is a very high 77x, but valuation is not an object for this company. Like the rapper said, the proof is in the progress. And Upstart’s proof is the rapid progress — that is growth  — of its AI-driven platform that enables lenders to more accurately and efficiently assess borrowers’ ability to pay back their loans.

Moreover, UPST should get a big boost from lower interest rates going forward, and the company is expected to start generating significant profits in 2025. Also noteworthy is that the shares rocketed 117% higher in the three months through Dec. 10. 

In light of all of these points, I recommend that growth and momentum investors buy UPST stock. The name is particularly well-suited for growth investors who are looking for increased exposure to AI software makers.

Big Beneficiary of Lower Interest Rates

Upstart generates revenue partly by selling loans that it makes. When interest rates are high, it historically has had a more difficult time finding buyers for these loans. And when rates are lower, it has been able to benefit from strong demand for them. 

Upstart also obtains fees from the lenders that use its software. Since lending tends to accelerate during periods of low rates and the Federal Reserve seems intent on cutting rates again later this month, the amount of revenue that Upstart receives from these fees should significantly climb going forward.

This trend appears to have already started after Fed policy makers cut rates twice in 2024, as Upstart’s revenue jumped 20.5% in the third quarter compared to the same period a year earlier. And suggesting that Upstart is expected to continue to benefit from lower rates going forward, analysts, on average, predict that its sales will surge an impressive 37% in 2025. 

Profits Are on the Way

Analysts are also optimistic about the outlook of the company’s bottom line. Indeed, their mean estimate calls for its earnings per share to surge to 54 cents in 2025. The company lost 6 cents per share last quarter and was in the red by 17 cents per share and 31 cents per share in Q2 and Q1, respectively. 

My sense is that these days, the Street is very enthused about growth companies that are just becoming significantly profitable. For example, Palantir in Q2 of 2023 reported EPS of 1 cent, and its EPS rose to 6 cents in Q3 of 2024. On Aug. 20, 2023, its stock price closed at $14.53. The shares closed yesterday (Dec. 11) at $78.40.

Disclaimer: At the time of writing, the author did not hold a position in any of the stocks mentioned in this article. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.

Larry Ramer is currently ranked 156 out of 30,278 financial bloggers analyzed by TipRanks, with a 17.1% return on his buy and sell ratings. He is one of the founding contributors to this newsletter. 

Larry focuses on contrary investing and specializes in the renewable energy and consumer discretionary sectors. Among his highly successful, contrarian picks have been Plug Power, Exxon Mobil, solar stocks, and airline stocks. On the downside, he was an early predictor of the collapse of cryptocurrencies, marijuana stocks, Ocugen, and Meta Platforms.