Here We Go Again: Why Upstart Investors Should Tread Carefully

Upstart Holdings (UPST) shareholders have been on a rollercoaster ride, with the stock soaring 53% after the company's strong third-quarter results. However, investors should approach this rally with caution, as Upstart's history of volatility and high valuation warrant a careful examination.

Upstart's third-quarter results were indeed impressive, with revenue increasing 20% year-over-year to $162 million and adjusted loss per share coming in at $0.06, well ahead of expectations. The company's AI lending platform has proven successful in approving more applicants and offering lower interest rates, driving growth and capturing market share. However, investors should be aware of the risks and challenges that Upstart faces.

One significant risk is Upstart's fee concentration, particularly its reliance on Cross River Bank (CRB) for 60% of its revenue. Although the company has been diversifying its banking partners, the high concentration of revenue from a single source poses a significant risk. If the relationship with CRB were to sour, it could be devastating for Upstart's financial performance.

Another concern is Upstart's dependence on strategic partnerships, such as its relationship with Credit Karma and Intuit. These partnerships have been crucial for Upstart's growth, but they also introduce potential risks. For instance, Intuit's acquisition of Credit Karma could lead to increased competition, as Intuit has the financial resources to develop a competing product. Upstart must continue to demonstrate its competitive edge and maintain its strong performance metrics to retain these partnerships.

Upstart's high price-to-sales ratio of 12 is another reason for investors to tread carefully. While the company's growth prospects are attractive, the high valuation means that any hint of pressure could lead to a significant drop in the stock price. Approximately one-third of Wall Street analysts rate Upstart stock as a sell at its current price, indicating that the market is cautious about the company's valuation.

In conclusion, Upstart's strong third-quarter results have sparked a significant rally in the stock price. However, investors should approach this rally with caution, as the company faces several risks and challenges. Upstart's fee concentration, dependence on strategic partnerships, and high valuation are all factors that investors should consider before making a decision. Only risk-tolerant investors should consider Upstart at this time, and even they should be prepared to hold through volatility.