What happened
Shares of fintech company Upstart (UPST 2.71%) were rallying today, up 6.9% as of 2:53 p.m. EST.
The technology and fintech sectors were up strongly today perhaps as a reflection of increased optimism that inflation may be abating without too many job losses across the economy.
However, the tech and fintech sectors are also where we are seeing many companies laying off employees in significant numbers, and a report today out of Columbus, Ohio revealed Upstart is also partaking in the sectorwide cost-cutting efforts.
NASDAQ: UPST
Key Data Points
So what
As interest rates rose quickly last year, investors became hyper-focused on company profitability. Meanwhile, the companies that boomed during the pandemic had gone on a hiring binge, and many of their investors are now questioning if these companies really need all these people. Moreover, Elon Musk's severe layoffs at Twitter, which he acquired in October, appear to be inspiring technology companies far and wide to take a hard look at their employee counts and whether their companies can function just as well without all these people.
Today, the Columbus Inno, a business journal in Ohio, confirmed that Upstart had laid off about 70 employees at its Columbus office late last year. In addition, Upstart is looking for someone to take over its current sublease in the area.
That is likely helping sentiment for Upstart, which saw its revenue decline and earnings swing from positive to negative last year.
Upstart's business model, which uses AI-powered algorithms to more accurately underwrite personal and auto loans, has come under question over the past year. As Upstart isn't a bank itself, it has to constantly originate and sell its loans in order to maintain its financials.
Yet as interest rates spiked and recession fears emerged last year, Upstart's loan buyers pulled back, leaving the company to fend more for itself. In response, Upstart had to pull back on originations and also hold some loans on its balance sheet -- neither of which its investors particularly liked. As a result, its stock fell over 91% in 2022.
UPST Year to Date Total Returns (Daily) data by YCharts.
Now what
With its price so beaten down, it's perhaps not surprising that any hint of good news, even this mild cost-cutting effort, is yielding a big move higher in the stock price. At year end, Upstart's short interest as a percentage of its total shares outstanding was a very high 32.8%. That means any good news, whether with respect to inflation, interest rates, or company-specific factors, can lead to a big round of short covering. It appears we are getting one of those sessions today.
Yet while Upstart could have more to go in this big bounce off the bottom, the stability of Upstart's loan funding remains an issue, and any current or interested shareholders should monitor the funding question going forward. The company is set to report fourth-quarter earnings on February 14.
