What happened
Shares of Upstart (UPST +4.47%) rose 7.5% Tuesday as tech stocks continued to rebound after their worst month of trading since March 2020, when COVID-19 worries pummeled the market. The Nasdaq Composite only rose about 0.75% for the day.
So what
Fintech stocks, in particular, were among the rally's leaders. They've been getting hammered since November, when it began to become clear that the Federal Reserve was changing its approach to rising inflation, beginning a slow tightening of its ultra-loose and accommodative monetary policy.
Image source: Getty Images.
The Fed is now likely to start raising its benchmark fed funds rate in March. Multiple 25-basis-point interest rate hikes are expected this year, and the Fed has said it will shrink its balance sheet as well, which would gradually take liquidity out of the economy.
In October, Upstart -- which offers banks an artificial-intelligence-powered system for rapidly making lending decisions based on a much wider array of data points than traditional credit scores -- traded for $400 per share and was valued at 60 times revenue. Since then, the stock has come crashing down, hitting a nadir below $80 on Jan. 24. Even after its recent gains, it currently trades around $117.
Now what
Fintech companies' valuations took outsize hits during the past three months, although for many of them, the sell-offs were probably warranted, given the huge valuations they previously traded at.
I'm not ready to say the pain is done yet because the Fed may raise rates more times than expected this year or decide to start selling bonds to accelerate the reduction of its balance sheet, either of which could spook investors again. Additionally, Upstart recently has seen an uptick in delinquencies in loans originated through its platform. That could be a function of the company trying to serve higher-risk borrowers, which is part of its mission, but I am not entirely sure.
Finally, if this company does not show that it can continue to grow revenues as fast as it has previously, investors may sour further on the stock. Upstart is scheduled to deliver its fourth-quarter and full-year earnings results on Feb. 15. That report will tell us a lot about the direction in which the company is heading.
