Buying Upstart Holdings shares seems dangerous as macro challenges arise

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While I continue to believe in it Upstart Holdings’ (NASDAQ:UPST) the technology is very valuable and that the long-term outlook for UPST shares is quite positive, I think the artificial intelligence (AI) company in the cloud is facing tough short-term challenges.

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These challenges include both macro and micro problems. Given this situation, I continue to advise investors to wait for a better price before starting a new, bullish position on behalf of or buying additional shares of the company.

Valuable technology and strong growth

I have long argued that the potential of companies that have developed specialized AI tools is very strong. This is mainly because the production of sector-specific tools is very labor-intensive, knowledge-intensive and / or time-intensive. And in several previous columns, I argued that Upstart is in the latter category.

Actually as another InvestorPlace columnist, Mark Hake, recently suggested that Upstart’s AI technology is very valuable for banks. This is because its systems allow lenders to safely extend loans to borrowers with low credit scores who would otherwise be turned down. As a result, Upstart increases the maximum and minimum value of lenders and, as Hake rightly argues, UPST shares should be valued as a name in the market sector.

It is also important that the company continues to generate exceptional growth on an annual basis. For example, Upstart revenue in the third quarter more than tripled in the same period last year, from $ 194 million to $ 228 million.

Its earnings per share in the third quarter nearly quadrupled year-over-year to 60 cents, compared with 16 cents in the same period a year earlier.

We have a stricter macro environment ahead of us

On the downside, there are signs that Upstart’s growth is slowing down sensibly. His Revenue increased by 60% in the second quarter. compared to Q1, but reached only 18% in Q3 of Q2.

In addition, Upstart expects net income excluding some items in the fourth quarter to decline to $ 48-50 million from $ 57.4 million in the third quarter.

In addition, based on analysts ’average earnings per share estimate for 2022 for the company, the UPST share has a price-to-earnings ratio of 84. This is a very high estimate. Given the many macroeconomic concerns expressed by many investors, now is not the time to buy shares a company with a high valuation whose growth may slow down.

Among these concerns are high inflation and Fed response to inflation, which could include raising interest rates sooner than expected.

Growing investor concerns about these issues, Goldman Sachs recently pointed this out “The current rise in inflation will worsen this winter before it improves.”

At a time of rising interest rates that could easily be triggered by higher inflation, some investors are avoiding highly valued stocks. This is because higher interest rates allow more expensive for investors wait for the cash flows of highly valued companies to justify their share prices.

This is one of the reasons why in recent days, weeks and months the stock prices of many high-value companies – including Upstart, Rivian (NASDAQ:RIVN), in Nio (NYSE:NIO) have decreased significantly.

Bottom Line on UPST shares

Upstart has a valuable and very lucrative business. In addition, the company is preparing to expand into car loans. According to Upstart, the car loan market is six times larger than the current primary market: personal loans.

Given the last points, I believe that the shares of Upstart and UPST have a very bright long-term future. But given the current combination of slowed-down Upstart growth and a difficult macro environment for highly valued stocks, this is a dangerous time to buy stocks.

I therefore urge investors to wait for one or more of the following to happen before buying a stock: Upstart is starting to show that it can succeed in the car loan market, a UPST stock falls below $ 150, or the macro environment improves.

At the date of publication, Larry Ramer did not hold (directly or indirectly) any positions in the securities mentioned in this article.

Larry Ramer has been conducting research and writing articles on U.S. stocks for 14 years. He was employed by The Fly and Israel’s largest business newspaper Globes. Larry began writing columns for InvestorPlace in 2015. Among his very successful, opposing choices were Plug Power, Solar Shares, and Snap. You can reach it on StockTwits at @larryramer.

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