Shares of lending software outfit Upstart (UPST 9.13%) rallied 9.1% today as of 2:35 p.m. ET. Don’t let that jump fool you, though. It was another rough week for Upstart and fintech stocks in general after the U.S. Federal Reserve increased interest rates 0.75% in an attempt to beat back inflation. After today’s rebound, the stock is down about 6% over the last five days.
As a reminder, higher interest rates tend to lower the present value of risk assets like stocks. That explains the recent market turmoil as it balances higher Fed rates against specific company growth prospects.
Upstart in particular is grappling with issues as the economy heads into a slowdown — maybe even a recession. This fintech is young and has yet to contend with a real downturn in the credit markets. Shares are down some 77% so far in 2022 as a result, though the stock was highly inflated at the end of 2022 before the Fed started its monetary tightening campaign in earnest.
In May, Upstart announced its first-quarter earnings and downgraded full-year guidance as it adjusts to economic conditions. Of particular concern to some investors were the nearly $600 million in loans that showed up on the balance sheet during Q1 (compared to $252 million at the end of 2021). Management said it was carrying these loans to “test” new metrics in its software and says it has sold these loans subsequent to the last quarterly update.
The concern here is that Upstart could get hit with credit losses during an economic downturn if it carries excess loans on its balance sheet. Some investors also worry that the excess loan balance is some sort of indicator that the business model has changed (Upstart the financial services company versus its original focus on lending software). The jury is still out on this topic, so management will need to prove it’s still primarily a fintech and not a lender during its next quarterly update (likely in early August).
At any rate, the extreme volatility is a function of business-specific risks heightened by Federal Reserve actions and the uncertainty aggressive interest rate hikes could bring to the credit markets. It’s no surprise Upstart’s stock price has adjusted accordingly. Expect shares to remain highly volatile, even though they now trade for 19 times expected current-year earnings.