What happened
Shares of several fintech and tech stocks fell today, as investors prepare for what could be a make-or-break week for the recent tech rally.
Shares of the buy now, pay later (BNPL) company Affirm Holdings (AFRM -2.08%) traded roughly 9% lower as of 11:16 a.m. ET today. Shares of the artificial intelligence lender Upstart Holdings (UPST 0.79%) were nearly 6% lower, and the Brazilian digital bank Nu Holdings (NU -1.37%) had fallen nearly 8%.
So what
There's a lot on tap for the market that could have broad implications for tech and fintech stocks. The Federal Reserve has begun its July meeting, which will conclude tomorrow. Investors widely expect to see a 75-basis-point rate hike tomorrow but will be more focused on the Fed's comments on the economy and future rate hikes this year.
Image source: Getty Images.
Then on Thursday, the U.S. Bureau of Economic Analysis will release its preliminary estimate for how the economy grew (or potentially contracted) in the second quarter of the year.
In the first quarter, gross domestic product (GDP) fell by 1.6%. If GDP declines again, the U.S. would find itself in what many economists would consider a technical recession, in which GDP declines for two straight quarters. But this doesn't necessarily mean the economy is in a formal recession given how strong the labor market is. Most large U.S. banks also reported healthy levels of consumer spending in the second quarter.
The future progression of interest rates and the economy is extremely important for Affirm, Upstart, and Nu. All three make loans in some form to consumers, so more interest rate hikes and a slowing economy can lead to increased loan losses and a decrease in loan growth, especially if the labor market starts to deteriorate as well.
Upstart and Affirm also rely on investors to fund and purchase their loans in different capacities. But as the economy has become more uncertain, investors have been less willing to take on consumer loans, especially at Upstart. Recently, the company cut its revenue guidance for the second quarter, largely due to funding issues among its investor base.
I've been worried about Affirm because while the company puts more loans on its balance sheet than Upstart, even when the economy was much healthier there were reports about lots of customers of BNPL products missing at least one payment. It's hard to imagine this statistic getting any better with the economy starting to deteriorate.
Citigroup analyst Ashwin Shirvaikar recently lowered his price target on Nu from $9 per share to $7, largely because Shirvaikar expects to see loan growth come in slower than expected in the near term, with Nu expected to be more restrictive about who it lends to, given the economic uncertainty.
Now what
Given the issues Upstart and Affirm could continue to face as the rising interest rate environment progresses, and with a potential recession, I am still avoiding these stocks, despite their valuations getting more attractive.
I am still a fan of Nu, which has entered the banking scene in Brazil and other neighboring countries in a big way and now has close to 60 million customers with an extremely low customer acquisition cost. It might be a bumpy ride, but I think Nu has a huge opportunity to be a fintech disruptor and a winner in Latin America.
