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Last month, I recommended  Upstart Holdings (NASDAQ:UPST) stock.

Source: Postmodern Studio / Shutterstock.com

If you ran to your computer and bought some, then looked at it again 12 days later, I understand if you cursed my name. Why? UPST stock was down by almost 23% at the close of Feb. 24. It has recovered somewhat since then. But since the date of my article, Upstart stock is still down 12.5%.

That doesn’t mean you made a mistake. When markets are falling, everything falls. This is especially true for growth stocks, whose values are held up by revenue rather than earnings. In turn, UPST stock was caught in a downdraft.

Upstart at a Glance

Let’s recap. Upstart uses artificial intelligence (AI) to help banks and — more importantly — banking software make better investment decisions. After buying a company called Prodigy Software, it began selling to auto dealers and will soon sell to companies making home loans.

Overall, the quality of the software is key. That’s tough to measure, except through client wins and revenue growth. Most competitors are still being funded by venture capital. This is an area where you are going to see surprises, mergers and acquisitions.

Furthermore, Upstart went public in December 2020 at $20 per share, a market capitalization of $1.45 billion. As it stands now, UPST stock is trading at a little more than $105 per share, a market cap of $8.67 billion. However, at its October peak, it sold at about $390 per share. That said, I like to ring the cash register on winners for just this reason, selling part of a position and playing with house money.

Moreover, Upstart will report its fourth quarter and fiscal year 2021 earnings on Feb.15, and big things are expected. Quarterly marks like a profit, earnings per share (EPS) of 51 cents, and revenue of $262.85 million.

Overall, the company is sound, so we’ll wait and see.

The Risks for Upstart

Upstart’s success, or its ability to find good risks, depends on how much data it has. Thus, each time it gets new customers, its system gets better.

Everyone knows this. That’s why when bigger players get into the market, UPST stock falls. This recently happened with Visa (NYSE:V). They’re not yet a direct competitor, but it bought Pagaya, a firm that is focused on credit cards.

Another risk to Upstart stock is rising credit risk, which is going to happen with rising interest rates. This was a theme in January. Many stocks in the credit automation space — from “buy now, pay later” company Affirm Holdings (NASDAQ:AFRM), to processor Paypal Holdings (NASDAQ:PYPL) — fell hard during the month.

When growth stocks are in season, they can zoom upwards. As I touched on earlier, Upstart stock was selling for $390 per share in October. Shorts quickly entered the market there, though. Currently, a little more than 11% of the float in Upstart stock is being held short.

That’s why many analysts are only pounding the table now for Upstart. You buy good companies when they’re out of fashion, at the bottom of the market cycle.

The Bottom Line on UPST Stock

Collectively, if Upstart beats estimates next week, you’re a winner. If it misses slightly, you might want to buy more. Additionally, much of the action following earnings will be based on its guidance for the next few quarters. Therefore, if management is conservative, the stock could fall further.

My investment thesis is that you buy good companies and hold onto them. You let time be your ally against the machines, buying based on a three-to-five-year time horizon. I have mistimed some investments in the last few years and have had some losses. But when the company is good, you stand by it.

Honest companies that cut customers’ costs are always going to be winners. And I see nothing at Upstart that would make me change that view.

On the date of publication, Dana Blankenhorn held a long position in UPST. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.

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