Why Upstart Rebounded Today, Defying Market Fade

Why Upstart Rebounded Today, Defying Market Fade


What happened

Artificial intelligence (AI) lending platform Upstart (UPST 2.57%) rallied on Thursday, a further 2.6%, even as broader markets fell more than 1%.

There wasn’t much company-specific news today, but Upstart was tracking higher along with other smaller-cap fintech stocks today. That’s an unusually positive move, given that fintech stocks have been among the hardest hit this year.

This may be something of a rotation, as higher inflation coupled with resilient employment and consumption data could be bullish for companies benefiting from interest income, as long as higher rates don’t send the economy into a tailspin. the recession

And that

Investors have been very concerned with Upstart this year amid rising interest rates and the possibility of a recession. Upstart’s lending models began to underperform earlier this year as the 2021 vintages failed to capture the sharp rise in inflation. Additionally, rapidly rising interest rates made buyers of Upstart loans cautious, forcing Upstart to retain some loans on its balance sheet. That unwelcome change for investors has led to a shocking 83% drop in stocks this year.

However, Upstart’s low stock price, combined with a few other factors, could be why the stock is defying the gravity of the market today. Although the market is terrified of a recession amid rising interest rates, which would be bad for all lenders, today we saw two data points that point to a resilient job market and growth in consumer spending.

Weekly initial jobless claims fell to 213,000 this week, below expectations and down from a revised 218,000 last week, and remain very low. Additionally, US retail sales remained resilient, with another report this morning showing spending grew 0.3% after a 0.4% drop in July.

Therefore, the recession that so many have feared does not seem to be here, at least not yet.

In company-specific news, Upstart announced yesterday that it had won the 2022 Service Innovation Award from the National Association of Federally Insured Credit Unions (NAFCU). The award is based on technological innovation and how it leads to success for credit unions.

Now what

While many have canceled Upstart this year, value investors may want to give this company a second look. Without a doubt, there is a lot of uncertainty, both economically and in terms of the company’s business model.

Still, the administration has maintained that adjustments to its AI lending model this year to account for inflation are leading to better results, and the administration has also increased transparency, releasing plenty of data in August.

In addition, management said it was moving to acquire more long-term committed capital so that it doesn’t have to deal with funding constraints every time its loan-buying partners freak out. However, there aren’t many details on that yet, as it will take a while for Upstart to put those buyers in place. Hopefully yesterday’s award will help credit unions and banks warm up to the platform again.

Loans can be cyclical, and we will definitely enter a down cycle in 2022 if we are not already in one; however, for investors looking to get greedy when others are afraid to anticipate a turnaround, it may be time to put the “fallen angel” Upstart, as well as other fintech stocks, on their buy list.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool holds positions and recommends Upstart Holdings, Inc. The Motley Fool has a disclosure policy.


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