Short Sellers Love Upstart Holdings After 38% Gain

Investing

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Published: July 18, 2024 11:21 am

Key Points

Investors have been turning to small cap stocks over the past few weeks, with the Russell 2000 Index up 11% so far in July.
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Artificial intelligence is all the rage right now, but with giants like NVIDIA (NASDAQ: NVDA) taking it on the chin today, the industry is showing how it is just as prone to pullbacks as any other. Shares of NVDA fell by more than 13% over the past five days, including a staggering 6.64% fall on Wednesday, July 17.

Unfortunately, the same fate — or worse — seems to be in play for a much smaller AI company: Upstart Holdings Inc. (NASDAQ: UPST). The $2.72 billion market cap company has seen its shares rise a prolific 38% over the past month. But by zooming out, the picture becomes much clearer. UPST is down over -21% in 2024, -42% over the past year and -92% from its all-time high price of $390 on Oct. 15, 2021.

As its recent gains do not seem sustainable, short sellers have targeted the company, with 25.159 million of its 87.88 million shares outstanding currently being shorted. That equates to 28.62% of Upstart Holding’s total shares.

An Easy AI Bubble Target
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Upstart Holdings has been a popular name in speculative AI stock circles this year, when shares opened at $38.80 on the first trading day of 2024. Expectations, like for the broader AI industry, were lofty. But disappointing earnings in the first quarter provided a necessary reality check when the company saw an EPS of -31 cents, continuing its trend of negative earnings that has seen it only produce positive results once in the past eight quarters dating to the second quarter of 2022. The consensus EPS forecast for the second quarter of 2024 hardly instills confidence at -34 cents per share.

In the first quarter of the year, Upstart Holdings posted negative revenue of -$7.39 million with its net debt holding steadily above $612.80 million for the fifth consecutive quarter. The company’s burn rate is drawing attention, too. In 2022, it posted free cash flow of -$697.59 million, and in 2023, that figure was -$172.58 million.

Over the past 12 months, insiders have been liquidating their positions, with insider selling outweighing insider buying 97 to 16. Institutional ownership has fallen to 43.95%, and the company’s price-to-earning (P/E) ratio is looking bad and getting worse:

2023 P/E ratio: -11.88
Estimated 2024 P/E ratio: -11.84
Estimated 2025 P/E ratio: -22.19
Estimated 2026 P/E ratio: -47.7

This has resulted in the Wall Street Journal giving UPST a one-year median price target of $18. Shares are currently trading for $30.91, meaning the Journal‘s median target represents 41.76% downside potential.

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