Stocks to sell

AI Fever: Is the Recent UPST Stock Rally Just Smoke and Mirrors?

It seems like anything and everything with an artificial intelligence (AI) angle is red-hot nowadays. This can help to explain why Upstart (NASDAQ:UPST) stock rallied in May and early June. Before you jump on the bandwagon and invest in Upstart, however, just remember that price-chasing can be bad for your financial health.

As we’ll discover, AI fever probably wasn’t the only contributing factor to the bullish sentiment surrounding Upstart. Nevertheless, there are clear-cut reasons not to invest in Upstart now, especially if you prefer businesses with firm fundamentals.

What Prompted the Rally in UPST Stock?

Impressively, UPST stock rallied from early $12 and change in early May to $30 in early June. Let’s put this in context, though. The stock was worth nearly $400 in October 2021, and bear in mind, Upstart hasn’t enacted any recent reverse stock splits.

Thus, when we look at the bigger picture, the Upstart share-price rally looks like a minor bounce within a longer-term downtrend. Still, it’s worthwhile to consider the reasons for the recent bounce.

Let’s start with the most obvious catalyst: the AI hype of 2023. Upstart operates a lending platform that utilizes machine learning. Personally, I don’t view this as a valid reason to furiously buy UPST stock. It’s not as if Upstart has a generative AI chatbot that can compete with OpenAI’s ChatGPT.

The other major catalyst is, most likely, a short squeeze. As InvestorPlace contributor William White reported, Upstart secured $2 million in funding in May. Oddly enough, this isn’t mentioned on Upstart’s news page. Furthermore, a Reuters report observed that “the lack of details on deal terms prompted caution” among analysts on Wall Street.

Ultimately, White attributed the 32% jump in UPST stock to a short squeeze. I concur with White’s assessment of the situation and feel that the $2 million in funding was just an excuse for short-squeeze traders to push the share price up temporarily.

Problems With Upstart’s Financial Figures

Just because short-term traders were able to boost the Upstart share price doesn’t necessarily mean the rally will persist throughout 2023. As the old Benjamin Graham/Warren Buffett saying goes, the stock market is a voting machine (based on sentiment) in the short term but is a weighing machine (based on a company’s fundamentals) in the long term.

And, the weighing machine could crush UPST stock later this year. Upstart’s fundamentals are alarming, with the company having reported three consecutive unprofitable quarters. Furthermore, the future outlook for Upstart doesn’t look great, as high interest rates tend to inhibit borrowing and lending activity.

Additionally, Upstart’s sales trajectory is definitely trending to the downside. During 2022’s fourth quarter, Upstart generated $147 million in revenue, down 52% year over year. Even worse was Upstart’s revenue in the first quarter of 2023, which amounted to just $103 million, down 67% year over year.

The UPST Stock Bounce Isn’t Sustainable

Share-price bounces can occur during longer-term downtrends. They don’t always signal a bottom, and I expect Upstart’s subpar financials to pull the company’s stock down throughout 2023.

In other words, don’t let the market’s voting machine distract you from the long-term weighing machine. The bounce in UPST stock seems to have been prompted by AI hype and possibly a short squeeze. It’s not sustainable, so don’t be a price chaser and don’t be tempted to invest in Upstart now.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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