Upstart (UPST) as a concept is extraordinary in my eyes because it assigns credit ratings with a much more forward-looking approach than traditional loan facilitators do. Furthermore, the AI used by the firm is flawless, with speed and accuracy being the name of the game.

However, as an investor, it’s critical to remind yourself that you’re investing in a stock and not only the company’s concept, which means that we need to determine whether its potential is priced-in or not.

Next year’s market climate will be much different than it’s been the past 2-years. I, for one, expect a more price-efficient market, which means that investors will need to start distinguishing good companies from undervalued stock prices if they’re to realize gains.

UPST stock could be a prime example of how a good company doesn’t always translate into a good stock.

UPST stock Won’t Benefit From the Cyclical Trade

Most of you would’ve heard about the rate hike buzz by now and how that will stimulate banking stocks. The theory behind this is that if the U.S. Federal Reserve raises interest rates, the debt market will be more lucrative to originators as the spreads they’d be able to charge on loans will increase.

Upstart won’t necessarily benefit from this climate as it’s considered a hybrid between an advertising platform and a brokerage rather than a lender. This means that its revenue will actually decrease with higher rates because the transactional volume will likely taper off slightly as soon as rates rise.

Further to the above, Upstart is a growth stock rather than a value play. Rising interest rates in 2022 could be detrimental to growth stocks as it tends to flatline their exponential earnings growth curve.

Upstart’s revenue and EBITDA surged over the past year, coming in at 187.56% and 447.28% respectively; these figures will likely diminish over the coming year, and I can’t help but think that the stock’s recent drawdown has been the market’s way of pricing in the expected decline in growth for next year.

A final matter to mention regarding cyclicality is J.P. Morgan’s recent neutral rating on the stock, with analyst James Faucette using a similar argument to mine in claiming that the stock’s growth has been priced in for now. Faucette thinks that Upstart’s relationship with its investors has enabled it to perform well in 2021, but the current market climate won’t allow that to sustain itself.

Valuation & Momentum

Let’s start with the latter to provide context to the valuation argument. Upstart’s relative strength index (RSI) is below 30, indicating that the stock has been oversold, but this doesn’t necessarily mean that it’s a “buy the dip opportunity.”

For this to really be a buy low, sell high opportunity, we’d need to see an uptick in volume and a sign that the stock’s going to breach its moving averages; as of now UPST stock possesses neither of these attributes, and I believe that it’s due to a valuation issue.

Here’s the big valuation problem; by comparing Upstart stock to its sector peers, it can be observed through price-sales and price-cash flow premiums of 3.47x and 4.46x that investors have gotten ahead of themselves. Adding to this is the argument that the stock could be the victim of a cyclical downturn, meaning that these ratios could play a key role in investor sell-offs moving forward.

What now for UPST stock?

A few investors are likely to buy into the recent dip, but I don’t think it will prevent a further downward trajectory. UPST stock has a massive valuation issue induced by over-optimism from investors during a pent-up broader market.

Furthermore, the market’s set for a cyclical swing as monetary policy changes are en route, and Upstart stock’s characteristics mean that it could be a victim of such policies instead of being a beneficiary.

The bottom line is that the stock isn’t worth the risk right now.

On the date of publication, Steve Booyens did not hold any long or short positions in any of the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.