What happened
Shares of fintech and e-commerce related stocks Upstart (UPST +2.97%), Affirm (AFRM +7.09%), and MercadoLibre (MELI +3.27%) were rallying today, up 2.9%, 10.8%, and 5.3%, respectively.
There wasn't much in the way of company-specific news today driving these stocks, but it appears that after several consecutive weeks of declines, the most beaten-down parts of the market, including high-growth technology and fintech stocks, are seeing a rebound. MercadoLibre also did get a bit of good news individually, as a large competitor announced it would be retreating from some of its markets.
Today's big gains could have been enhanced by short-covering, with many institutional funds positioned against these names amid the dual threats of rising long-term bond yields and potential recession as the Federal Reserve raises rates.
However, this week saw some positive data points on those fronts, with some inflationary indicators easing and the job market remaining resilient. When combined with beaten-down share prices, that's a recipe for big upward moves today.
NASDAQ: MELI
Key Data Points
So what
These stocks had sold off since the middle of August on fears that ongoing inflation and interest rate hikes would lead to recession, and therefore credit losses among lenders.
Upstart is an AI-powered lending platform for personal and auto loans to buyers with relatively low FICO scores, and its models have been tested this year. Upstart's 2021 vintages showed increased charge-offs as inflation bit into consumer discretionary income, although management said it had adjusted its models in 2022. Moreover, since Upstart's model was to sell its loans to third parties, it faced pressure as its loan buyers retreated from the market amid the macroeconomic uncertainty, forcing it to hold some loans on its balance sheet and increasing its risk.
Affirm, as a buy now, pay later platform for point-of-sale purchases of large-ticket items, also has underwriting risk. In the recent earnings release, Affirm did note a more "normalized" credit environment with increasing charge-offs and loan loss provisions. Still, coming off the extraordinarily low charge-offs during the pandemic and stimulus payments, the company is still making healthy net interest margins.
While MercadoLibre is known as Latin America's leading e-commerce site, its Mercado Pago fintech segment is quickly becoming more consequential, with a lot of Mercado Pago's recent growth from both merchant and consumer lending. MercadoLibre's credit book grew 230% year over year last quarter, which may be causing some consternation among investors who prefer a cleaner, fee-based business.
As credit concerns have weighed down each of these names, the reversal of those concerns is sending each stock higher today. The precise reason is a bit hard to pinpoint; however, earlier this week, U.S. continuing unemployment claims came in lower than expected, perhaps assuaging concerns that the Federal Reserve is tightening the economy into recession. Oil prices also dropped on the week, although they are up today. Meanwhile, other inflationary indicators such as shipping rates and used car prices are in outright deflation, with prices falling in August.
If inflation falls faster than expected, the Federal Reserve won't have to tighten financial conditions quite as much. Given how far these economically sensitive stocks had fallen on fears of recession, they spiked on the relatively good news off of very low levels.
MercadoLibre may also be rising in response to the news that competitor Sea Limited is exiting certain Latin American markets. Sea Limited has become a fierce e-commerce competitor in Brazil, but announced it would be retreating from Argentina, Chile, Colombia, and Mexico amid cash burn problems. That should benefit MercadoLibre, which has established operations in those countries.
Now what
These stocks are each down a lot on the year, with MercadoLibre down 31%, Affirm down 76%, and Upstart down 82%. The sell-offs were probably deserved, as each stock traded very expensively to begin the year, and the macroeconomic environment turned against each in a big way.
However, we are now in a period where these stocks may be finding a bottom, or over-shooting to the downside. Should conditions improve, these growth stocks could be some of the bigger winners; however, that's the reward investors get for taking on these larger risks, which are by no means vanquished yet. Investors will get more data next week, when the August Consumer Price Index report comes out on Tuesday, Sept. 13.
