The past month or so has been terrible for fintech company stocks, but on Tuesday, they shifted gears as investors began to shake off their fears about the potential risks carried by the omicron COVID-19 variant. On a day when the Nasdaq Composite climbed by 3%, Upstart (NASDAQ:UPST) rose roughly 10%, LendingClub (NYSE:LC) gained about 8%, and Katapult (NASDAQ:KPLT) rose by 14.3%. Still, over the past month, Upstart is down by about 42%, LendingClub is down nearly 31%, and Katapult is down more than 21%.
This autumn, worries intensified that inflation would be stronger and last longer than experts previously expected. In October, the Consumer Price Index, which tracks prices across a basket of common goods, was up by 6.2% year over year. It was the largest such CPI increase in more than 30 years.
The direction things were going was further clarified when Federal Reserve Chairman Jerome Powell told Congress that he would no longer use the word "transitory" when discussing the recent price inflation. The Fed also indicated it would taper its bond-buying program more rapidly than it had previously planned, a signal that hikes could indeed be coming in benchmark interest rates next year. Just months ago, many believed the Fed would not raise the fed funds rate until late 2023 or 2024. Now, Bank of America research analysts are modeling for three rate hikes in 2022.
Upstart, LendingClub, and Katapult all leverage technology, artificial intelligence, and data to make loans to consumers. Higher interests rates mean these companies can charge higher interest on their loans, but it also means that the cost of the funds needed to originate these loans could rise too. Furthermore, higher interest rates also mean higher costs of borrowing for consumers, and typically, higher default rates. While fintech lending models are supposed to be quite good, investors are curious to see how they will fare during different phases of the interest rate cycle.
Finally, higher interest rates hurt high-growth tech stocks because they make materials and debt more expensive, and erode the value of companies' future earning power. Upstart at one point this year briefly traded at 60 times revenue. With that kind of valuation, there isn't a lot of room for error.
And then of course, with everything going on with inflation, the world found out about the omicron variant, which features significantly more mutations than the delta variant, and looks both more contagious and more able to evade the immune responses generated by current COVID-19 vaccines.
That news hit the market hard as investors wondered if there would be a return to lockdowns or if gross domestic product in 2022 would take a big hit. For Upstart, LendingClub, and Katapult to thrive, they need consumers taking out loans, making purchases, and spending.
A couple of months ago, Upstart exceeded a $26 billion valuation. At that point, I thought the fintech had simply risen too fast and needed to come back to a more reasonable valuation -- which it has since done. LendingClub and Katapult were trading at much more reasonable valuations; they simply got caught in the stampede away from the fintech sector.
Hopefully, omicron won't prove to be quite the danger that the market initially feared it would be -- certainly, there are some early signs that indicate it causes less severe illnesses than earlier variants of concern.
Inflation could be tough for these three companies, but I still think they could perform well in 2022 if the economy is decent. I remain quite bullish on LendingClub, in particular, given its business transformation this year, its astounding growth over the past few quarters, and its valuation.