What happened
Shares of artificial intelligence (AI)-based lending platform Upstart Holdings (UPST -1.79%) rallied 5.3% on Thursday, as of 1:44 p.m. ET.
The beaten-down fintech stock has fallen some 95% from all-time highs posted last year; however, with a lot of fear baked into the stock already, the stock is in rally mode as investors look for a path to recovery. The announcement of a closer partnership with one of its third-party credit unions is likely helping sentiment today as well.
So what
Upstart is a financially sensitive stock, and investors seemed to take heart in some economic data this week that indicated inflation may be softening. Recent housing data showed home prices fell slightly in August, which could mean that shelter inflation -- a big part of the core consumer price index (CPI) -- could moderate in the future. Tuesday's Job Openings and Labor Turnover Survey (JOLTS) also showed a larger-than-expected decline of 1.1 million job openings, suggesting a cooling labor market.
While a softening job market is normally a negative sign, the danger to the economy these days is overheated inflation. So, a cooling of the job and housing markets is actually what the Federal Reserve wants to see. The quicker inflation cools, the sooner the Federal Reserve can loosen its monetary policy.
Yesterday, Upstart also continued to rack up deeper relationships with its third-party loan buyers. That's another good sign, since a lot of Upstart's problems this year can be traced back to its loan funding partners pulling back as interest rates rose. Upstart, which had fashioned itself as a pure "platform," had to slow growth and began holding more loans on its balance sheet, in violation of its own business model. Investors revolted, after which Upstart management said it would no longer use the balance sheet, only to reverse itself on the second-quarter earnings call, admitting it may use its cash pile from time to time to hold loans.
On Wednesday, the company announced a closer relationship with the Atlantic Federal Credit Union. The AFCU had been a partner since September 2021 as a loan buyer, but the company recently forged a closer partnership around personal lending, joining the Upstart Referral Network. Now, an applicant who goes to Upstart for a loan and who meets the AFCU's lending requirements will be redirected to the AFCU-branded experience to complete the application and loan process.
This appears to be a way for Upstart's platform to lead to more direct customer acquisition for its partner banks and credit unions, which could help tighten the relationship and may entail a higher fee to Upstart. Given that its funding partner relationships have been behind a lot of Upstart's problems this year, the new partnership announcement is definitely a positive step.
Now what
There's a lot of uncertainty about the economy and Upstart's business model right now, but with the stock down so much, incremental positive news could lead to big gains.
I'm still a bit skeptical Upstart's model is the best one for the industry, as several of its fintech peers have decided to get a banking license to acquire their own low-cost deposits. Upstart is rejecting that approach, given its model to target borrowers who may be overlooked by traditional, regulated banks. However, that opens Upstart up to these funding headaches whenever the economy goes into a soft patch.
Given the back and forth from management this year on holding versus not holding loans, it appears Upstart's tech-oriented team is still trying to figure out the best long-term industry model. That uncertainty is likely to hang over the stock until management decides on a more definitive strategic course.
