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Why Upstart Holdings Stock Dropped 15% in April

What happened

Lending platform company Upstart Holdings (NASDAQ: UPST) didn't have as volatile a month in April as it did the month before. Shares soared 90% in a single day after Upstart reported its first financial update as a public company in mid-March. But things settled down in the month of April, as shares moved 15.4% lower according to data provided by S&P Global Market Intelligence.

So what

One reason for the monthly decline was likely just investors taking a breather after the March surge. Another was the announcement the company made on April 6 that it was going to raise capital by offering 2 million new shares of common stock. Upstart shares dropped almost 13% the following day to about $126 per share. Two days later, the company said it would price its stock offering at $120.

Image source: Getty Images.

Now what

Upstart uses an artificial intelligence-powered platform to help banks and credit unions assess loan risk. The big jump in March came after the company guided investors for 115% revenue growth for this year, after posting 42% growth to $233 million in 2020. That acceleration is thanks in part to the acquisition of Prodigy Software, which will expand Upstart's offerings into the auto loan segment. Prodigy is a provider of cloud-based automotive retail software that helps bring dealership operations more in line with the new ways people are shopping for cars.

But the excitement over that growth rate brought the company's market capitalization to $12 billion, against expected 2021 sales of about $500 million. A price-to-sales (P/S) ratio of 24 is lofty, especially when market sentiment turns away from high-growth stocks as it has this spring. Even the price of the share offering still equated to a ratio of 18.

The stock has continued to trend down another 12% in the first week of May. Upstart next reports earnings on May 11. Even though the P/S ratio is down to a more reasonable level of about 14, that still requires strong growth to justify. But Upstart is certainly in growth mode right now. Investors should look to the earnings report to see if it is expected to continue or even accelerate. If so, shares should hold on and could bounce back higher.

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Howard Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Upstart Holdings, Inc. The Motley Fool has a disclosure policy.


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