What happened
Shares of the artificial intelligence-assisted lending platform Upstart (UPST -3.95%) traded nearly 5.5% lower as of 2:33 p.m. ET today after some recent negative sentiment from Wall Street and as new inflation data came out this morning.
So what
Upstart, which sells the bulk of its loans to investors, has been waiting for the Federal Reserve to stop hiking interest rates because the intense, rising interest rate environment has pretty much dried up the capital markets, forcing the company to slow originations.
This morning, new inflation data from the Consumer Price Index (CPI), which tracks the prices on a market basket of consumer goods and services, showed that inflation is indeed slowing. The CPI only rose 0.1% on a monthly basis in March and was only up 5% year over year after being up 9% year over year in the middle of 2022.
But the slower inflation didn't seem to change the market's mind about an upcoming rate hike at the Fed's May meeting. Following the report, more than 69% of traders in the futures market were still betting on a quarter-point rate hike in May, which is pretty much the same as before the inflation data came out. The longer rates stay higher, the more difficult it will be for Upstart.
Yesterday, analysts at JPMorgan Chase initiated coverage of Upstart with an "underweight" rating and an $11 price target (the company currently trades at around $16.80). JPMorgan analyst Reginald Smith said defaults on Upstart-originated loans have increased, and investor demand for Upstart loans is still weak. Despite this, shares of the company are still up more than 30% this year.
Now what
While I do agree that the company's prospects will get better as the Fed stops hiking rates, I do not think that makes it a long-term buy right now.
As I recently explained, the company's main thesis of superior credit underwriting has not been proven yet, and Upstart borrowers could face more headwinds as they continue to spend down savings and potentially enter a recession.
After this recent difficult period, I think the fintech company will be viewed as a cyclical business for quite some time, which may limit the earnings multiple it gets from the market.
