What happened
Shares of fintech company Upstart Holdings (UPST 0.79%) surged Wednesday, climbing 8.64% in today's trading.
While there wasn't any company-specific news driving the upturn, Upstart is a highly volatile growth stock, both to the upside and the downside. Moreover, since it is in the lending business -- even though its business model entails selling its loans to third parties -- the company remains highly sensitive to overall macroeconomic conditions.
On that front, some headwinds seen over the past month and year to date eased on Wednesday, sending the stock higher.
So what
Upstart had fallen by about a third over the past month, after long-term yields began rising again, and Federal Reserve Chair Jerome Powell gave a very hawkish speech in Jackson Hole in late August. Yet down 33% in a month and 84% for the year amid soaring oil prices, inflation, and higher long-term interest rates, Upstart sprang to life today as those trends reversed -- at least for one day.
In the beginning of the year, Upstart saw some of its 2021 credit models experience a higher degree of charge-offs than modeled as inflation bit consumers hard. Upstart's model targets "overlooked" borrowers with big data and artificial intelligence, so Upstart's borrower base tends to have lower FICO (product of Fair Isaac) scores than other lenders who target Prime customers -- and lower-income customers were especially hard hit by food and fuel inflation.
Wednesday saw some promising signs on the inflation front, as oil prices fell hard, down more than 5% on the day and now at levels not seen since January, before Russia's invasion of Ukraine. Robust supply and new Chinese lockdowns were the cause for lower oil prices today, but the U.S. economy seems in solid shape. Lower gas prices are like a tax cut to Upstart's borrower base, and with employment numbers still coming in strong over the past two months, that's a potential "Goldilocks" scenario.
Today also saw the release of the Fed's Beige Book, one of eight annual reports on business conditions throughout the country. Although the Beige Book noted growth and spending are slowing due to higher interest rates and economic uncertainty, that is also necessary for inflation to get back under control. The 10-year Treasury bond yield, which had been rising over the past few weeks, backed off its recent highs, down 7.5 basis points to a yield of 3.26% as of this writing.
Moderating growth and inflation along with people still being able to find jobs would be a good scenario for Upstart, since its borrowers would see lower inflation and gas prices while still being able to stay in or find a job.
In addition, while Upstart has lowered its growth amid tough economic conditions, it is still a growth stock, so it benefits from lower long-term interest rates, as the bulk of its earnings power is still well out into the future. A lower discount rate on future earnings would raise the value of any growth stock's future earnings.
Now what
Fintech stocks got the worst of both worlds this year, as higher interest rates caused their growth multiples to rerate; meanwhile, recession fears caused them to get hit doubly hard, since there are questions as to how well their underwriting models would perform in an economic downturn.
That's why the double dose of relief, from both falling oil prices and long-term interest rates, lit a fire under Upstart's stock today. If by chance the U.S. can pull off a "soft landing," with inflation moderating without a bad recession, there could be more days like this for Upstart in the future. Still, there is a high degree of uncertainty and discrepancy within the economic data, so investors should be prepared for more volatility in both directions in the near term.
