What happened
Shares of the artificial intelligence lending company Upstart (UPST 2.76%) rose today along with most fintech and tech stocks, despite receiving a bearish rating from Wall Street. The stock is trading roughly 7.8% higher as of 10:40 a.m. ET today.
So what
Tech stocks bounced this morning as investors awaited more key earnings reports that would give them greater insight into how the sector is faring in the high-interest-rate environment that is also still dealing with high levels of inflation.
But the company also received some negative sentiment from the Street. Mizuho Financial Group analyst Dan Dolev initiated coverage on Upstart with an underperform rating and a $17 price target, which implies downside from the company's current stock price.
Upstart is a company that has developed a proprietary credit underwriting algorithm that it believes can better underwrite loans to a variety of borrowers, even those that are lower on the credit spectrum in the subprime arena. The company's stock skyrocketed in 2020 and 2021 but has come crashing down this year as credit quality has deteriorated and institutional investors have been less willing to fund and purchase Upstart loans, which is a key component of the business model.
Dolev said there could be "more pain in coming quarters" because higher rates and high inflation could continue to pressure delinquencies and put pressure on funding. That may force Upstart to put loans it originates on its balance sheet, which management said last quarter that it may have to do. Investors reacted extremely harshly after the company did this in the first quarter of the year.
Now what
I would have to agree with Dolev here that the pain may not be done for this fintech stock. In the third quarter, the Fed jacked up its benchmark overnight lending rate by 0.75 percentage points in both July and September.
These rate hikes are going to significantly increase institutional investors' cost of capital, which is why I think Upstart could still be challenged from a funding perspective. Until there is a clearer line of sight, I am staying away from the stock.
