What happened
Shares of the artificial intelligence-assisted lending platform provider Upstart (UPST 2.76%) were nearly 7% lower as of 12:16 p.m. ET Thursday. It appears investors are continuing to worry about how much the Federal Reserve might raise interest rates next year.
So what
Earlier this morning, new data showed that jobless claims this week rose, but not enough to lead investors to believe that the labor market is deteriorating.
While normally a positive sign, Federal Reserve Chair Jerome Powell has previously said that the Fed needs to see some deterioration in the labor market for signs that it has beat back inflation. The unemployment rate in November remained unchanged at 3.7%. This is adding to existing fears that the Fed could raise interest rates more than anticipated or keep rates higher for longer.
Further interest rate hikes are going to continue to plague Upstart's business model. The fintech company largely originates personal loans and sells them to institutional investors, many of which fund them with higher-cost debt. The cost of this debt rises as the Fed raises rates. So these investors have had a higher cost of capital.
However, Upstart likely hasn't been able to reprice its loans enough yet to where the returns are attractive for investors. Additionally, Upstart largely originates loans to near-prime borrowers, who may run into financial issues if the economy tips into a recession next year, which could lead to loan losses spiking.
Now what
Higher interest rates and a tough economic outlook have pushed potential buyers of Upstart's loans to the sidelines. Upstart needs these investors to grow its business and has had to cut its guidance for originations and revenue this year.
The company will benefit as the Fed stops raising rates. But for now, I'd suggest investors also stay on the sidelines until it is clear the Fed is done hiking rates. I'd also want to see how Upstart loans fare next year from a credit-quality perspective.
