Why Upstart Holdings Shot Up as Much as 23.4% This Week

What happened

Shares of Upstart Holdings (UPST -1.79%) shot up as much as 23.4% this week, according to data from S&P Global Market Intelligence. The artificial intelligence (AI) lending platform had no big company-specific news, so we can chalk its volatile price movements up to broad market developments and the high short interest on the stock. As of the close on Thursday, Oct. 13, the stock is up 16.5% since last Friday's close.

So what

As I mentioned above, Upstart didn't give any specific updates on its business this week, so it is a bit unclear what exactly drove its stock to move so quickly. But I think we can boil it down to two possibilities.

First is the broad market movement this week in reaction to the September inflation report. Prices grew 0.4% month over month in September and are up 8.2% from a year earlier, which is well ahead of the Federal Reserve's target of 2%. To stamp out this inflation, the Fed is raising interest rates to make it tougher for lenders across the economy. Since Upstart powers consumer loans for banks and other lending institutions, rising rates can have a negative impact on lending volume and therefore on revenue.

OK, so why did Upstart's stock rise? It is likely because the inflation news was not as bad as investors were expecting, which drove the S&P 500 up 2.6% on Thursday. With Upstart's stock down 90% over the past year, it is unsurprising that this negative headline actually was positive for the stock, since investors have been pricing in extremely negative results.

Second, Upstart's stock has high short interest at the moment, estimated to be 37.75%. When a stock has high short interest, it means that many investors have borrowed shares to sell short, betting that the stock will go down. If shares rise -- as happened this week -- short-sellers may buy back their shares, further driving up the stock in what is called a short squeeze. This dynamic may have added to Upstart's volatility over the last few trading days. 

Now what

If you are an investor in Upstart focused on the long term, it is probably best to just ignore these short-term movements. The next important update from the company will come on Nov. 8, when it will release its third-quarter earnings. Wall Street has been pessimistic about the company's lending model amid tightening credit conditions and multiple guide-downs from management throughout 2022, which is why the stock is down so much in 2022. 

These Q3 results will be another test to see how the company is doing when the economy is not firing on all cylinders. If you are an investor in Upstart, you'll want to make sure to follow the earnings report closely.