Upstart Holdings (NASDAQ: UPST): Forecasts Must Raise Significantly to Justify High Valuation
Band Richard Bowman
This article originally appeared on Simply Wall Street News.
Upstart Holdings, Inc . ( NASDAQ: UPST ) shares have now risen 135% since the company released second quarter results less than six weeks ago. The business received another boost today when WSFS Bank announced the launch of a digital personal loan product powered by Upstart software.
Upstart and Affirm holdings ( NASDAQ: AFRM ), now appear to be preferred stocks in the fintech space, such as large fintech companies PayPal ( NASDAQ: PYPL ) and Square ( NYSE: SQ ) traded lower over the same period. The question now is whether Upstart has run too far too fast.
The stock is now trading at a price / earnings (or “P / E”) ratio of 438.1x, compared to the US market average of 17x. If we include today’s price movement, Upstart traded up to 482 times 12 month earnings. A large spread between the stock’s P / E and the market’s P / E isn’t surprising when you consider that the company’s profits have grown at 7 times the market rate over the past five years. years, and have accelerated over the past 12 months.
But for a stock to justify such a high price-to-earnings ratio, it will have to continue to grow earnings at a much faster rate than the average listed company. The following chart shows analysts’ forecasts for Upstart’s earnings over the next three years.
If we assume the company will deliver according to the best estimate by the end of 2023, the current price of $ 325 would represent a P / E ratio of 189. It would still be quite high if profits only increased to around 30%. . % – as implied by this estimate. Obviously, the estimates will have to increase significantly to justify the current price multiple.
Is there enough growth for start-up holdings?
It’s worth noting that few analysts cover Upstart, and the 2023 estimate above is the average of just two analysts’ forecasts. In addition, it is very difficult to estimate the future income and profit of a company like Upstart. The business is now in a phase of exponential growth, and there is a very wide range of possible outcomes.
P / E ratios are not very robust valuation tools on their own, especially for growing companies. But they give us an idea of how optimistic the market is about a company. When the market is bullish on a stock, positive sentiment should be sustained through earnings releases, analyst updates, and other company news.
The key to take away
The current valuation of Upstart is indeed high, but if the growth rate we have seen over the past 12 months continues, the P / E ratio will decline very quickly. But a high multiple is a significant risk to a stock price if positive sentiment is not sustained.
In the case of Upstart, it is important that the company continues to increase its forecast and that analysts’ forecasts continue to rise. You can follow these forecasts and the risks that may arise with our free scan for Upwork Holdings.
You might also be able to find a better investment than Upstart Holdings. If you want a selection of possible candidates, see this free List of interesting companies that are trading at a P / E of less than 20x (but have proven that they can increase their profits).
Richard Bowman, analyst at Simply Wall St, and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.