What happened
Shares of several popular fintech stocks continued to slump today, as investors prepare for the start of earnings season and new data this week that will provide a glimpse into the current state of inflation.
Shares of the buy now, pay later (BNPL) company Affirm (AFRM -4.61%) traded nearly 9% lower in the final hour of trading. Shares of the artificial intelligence lender Upstart (UPST -3.95%) traded roughly 1.4% lower, and shares of the digital bank SoFi (SOFI -3.76%) traded nearly 4% lower.
So what
There's a lot of new data that will come out later this week, including the closely watched Consumer Price Index (CPI), which tracks the prices of daily goods and services and is one way the market gauges inflation.
Image source: Getty Images.
Last month, CPI data showed that the index rose 8.6% in May on a year-over-year basis, which is more than investors had previously been expecting. It also called into question the prior belief by some investors that inflation had peaked, which is being watched very closely by the market. June CPI data will come out Wednesday, and economists expect the CPI to read higher than it did in May, potentially close to 9% higher year over year.
This is problematic because the longer inflation persists, the more aggressive the Federal Reserve will have to be when it comes to monetary policy and raising interest rates. Rate hikes have already proven to be a huge issue for tech and fintech stocks, which have sold off intensely this year.
For Upstart and Affirm, higher rates bring up several important issues. They could increase loan losses because the cost of debt is climbing for the consumer. But they also raise funding issues because, as investors become more concerned about the economy, they are less likely to purchase and fund loans, which is what Upstart's and Affirm's business model rely on, at least partially.
Earlier this morning, Goldman Sachs analyst Michael Ng lowered his rating on Upstart from "neutral" to "sell" and significantly cut his price target from $40 per share to $14.
"Although UPST's ~9% penetration of the U.S. personal loan market through 2021 has been impressive, we believe the recent slowdown in origination and revenue growth is evident of heightened competition and increasing funding costs for UPST partners, which reduces visibility into long-term growth and share gains beyond 2023 that historically have justified UPST's premium valuation relative to peers," Ng said in a research note.
He added, "Slowing growth and reduced confidence in UPST's differentiation in credit underwriting likely will catalyze a further de-rating of UPST valuation to be more in-line with its lending peers."
Now what
Unfortunately, rising interest rates are a big problem for Upstart and Affirm, and we could see another 0.75% hike later this month as well as more rate hikes later this year, which could keep this issue prevalent. For this reason and given the uncertainty around inflation, I can't recommend buying either of these two fintech stocks right now.
However, I am much more bullish on SoFi. Although its valuation is still high, SoFi recently became a bank, which gives it lower-cost deposits to fund originations. It also serves borrowers with much higher credit quality, which should be more resilient during the rising-rate environment and in a potential recession. SoFi is certainly my favorite stock of these three right now.
