What happened
Shares of Upstart Holdings (UPST +5.90%), Sofi Technologies (SOFI +4.82%), and Lemonade (LMND +6.78%) plunged at the market opening today, with each stock down more than 5% to start the morning. But by midday, each had recovered, with Upstart rocketing higher to an 8.4% gain, SoFi gaining 1.8%, and Lemonade up 1.7% as of 1:46 p.m. ET.
What caused such a big reversal? It's hard to say, as there wasn't much company-specific news on Tuesday. However, recession fears might be easing, just as a high-profile hedge fund disclosed a new position in both Upstart and SoFi, perhaps boosting sentiment for these beaten-down fintech stocks.
NASDAQ: UPST
Key Data Points
So what
Each of these stocks is economically sensitive, given that they are financial stocks that appeal to millennial and Gen Z consumers. Upstart uses artificial intelligence (AI) to underwrite unsecured personal loans and auto loans; SoFi targets grad students with student loans and then cross-sells its comprehensive suite of banking and financial products over time; Lemonade is an insurer that streamlines the insurance application process by using AI instead of paid agents.
It's hard to know exactly why these companies fell so much at the open. Each has had a nice bounce off their lows a couple of months ago, so perhaps it was due to investors taking some profits.
This morning, it was announced that the July U.S. industrial production index grew 0.6% month over month, higher than the 0.3% growth expected, fueled by auto production increases. You could believe since industrial production growth came in a bit hot, that the Fed might have to be more aggressive on its interest rate hikes.
However, this was just one data point and not as consequential as other inflation-related readings. Moreover, it shows the U.S. economy isn't in a recession -- at least not yet.
And the New York Fed announced that U.S. consumer revolving-debt balances surged 13% year over year to $1.125 trillion in the second quarter of 2022. That is not only the largest annual increase in 20 years, but also took revolving-debt balances past pre-pandemic highs.
You can chalk this debt surge up to high inflation and a consumer looking to spend. However, surging debt levels likely made investors cautious at the outset, as there are fears the Fed could tip the economy into recession. If that happens, there could be a lot of late or unpaid debts next year.
More unsettling was a tick up in serious delinquencies of 90 days or more, increasing from 3.04% in the first quarter to 3.35% in the second quarter, which the New York Fed analysts said was concentrated among lower-income and subprime borrowers. That is likely to hit Upstart the hardest of these three stocks, and therefore may explain why the stock had been down the most to start the day.
On the other hand, much of this news was already apparent for those who had been following fintech stocks this earnings season, especially Upstart, which had lowered guidance for revenue and earnings next quarter due to tightening financial conditions.
But things seemed to change around midday, likely for two reasons. First, Walmart delivered earnings that were better than feared. That seemed to indicate the U.S. consumer might not be in such dire straits. Walmart's disclosures have been particularly damaging for the markets this year, given its size and importance to the economy.
Second, around midday, growth-oriented hedge find Coatue Asset Management said that it had taken new positions in both Upstart and SoFi in the second quarter. With SoFi down 73% and Upstart down 91% from their all-time highs, it appears that the vote of confidence from a big institutional investor is affecting the stocks much more than the rehashing of difficult economic news, which may already be baked into the share prices.
UPST percent off all-time high. Data by YCharts.
Now what
Each of these growth fintech stocks has been battered in the first half of the year, and are still far, far below prior levels.
Therefore, it perhaps won't take as much good news to send these stocks higher. Last week, Lemonade beat its revenue estimates. While still inking losses, the stock soared on management's assertion that the current third quarter would mark "peak losses." Moreover, management promised that it would cut spending, and that its existing capital was enough to see the company to profitability.
Meanwhile, SoFi also rose after its earnings on Aug. 2, when it reported robust user acquisition, while also beating revenue estimates and raising guidance for the year.
And while Upstart missed expectations and guided lower on Aug. 8, the stock has fully recovered since, and then some. Perhaps investors now believe the worst news is out and already in the stock price. With Coatue's vote of confidence, investors now appear to be eyeing a big recovery, given that Upstart has sold off so much.
Still, this is just one day; these stocks can be volatile both to the upside and the downside. If inflation doesn't continue to come down as it has in July and August, the fortunes of these three fintechs could reverse.
