What happened
Shares of Upstart (UPST 2.76%) were soaring last month after the artificial intelligence (AI)-driven consumer lending company continued to benefit from excitement over artificial intelligence, signs of an economic recovery, and an ongoing short squeeze.
While there was no major news out on the stock during July, that momentum was enough to send Upstart shares soaring 92%, according to S&P Global Market Intelligence. The stock has been highly volatile over its history and is seen as a leveraged bet on the health of the overall economy and the strength of the credit market.
As you can see from the chart below, the stock marched steadily higher over most of the quarter.
So what
Most of Upstart's gains were driven by an extended short squeeze as 36% of the stock's float was sold short as of mid-July, and bearish investors seemed to buy back the stock as it gained on high volume last month.
Economic data showing inflation coming down and the economy continuing to rebound supported gains in the stock as Upstart is highly sensitive to the broader economy.
Upstart uses AI technology to originate and service consumer and auto loans, and its business soared through 2021 as interest rates were low, but the tightening credit environment spoiled its growth, and revenue has declined for several quarters.
The stock did experience a momentary setback when consumer peers LendingClub and LendingTree issued disappointing earnings reports, a reminder that the macro environment is still weak for consumer loans.
Now what
Upstart will get a major test next week when it reports second-quarter earnings on Aug. 8. Investors had cheered the company's guidance, which had called for sequential revenue growth to improve from $103 million to $135 million, a sign that demand from consumers and Upstart's banking partners may be improving, or at least that the worst of the downturn has passed.
The stock has surged roughly 400% since that earnings report as investors seem to be betting that Upstart has turned the corner. The company has laid off staff and cut costs in order to drive profitability and analysts are expecting it to report a loss of $0.07 per share, compared to a penny-per-share profit in the quarter a year ago.
Upstart generated strong profit margins in 2021 before the economic downturn hit and it can do it again, especially if the economy rebounds.
Expect a big move in the stock one way or another after its earnings report comes out, but it does seem that the worst has passed for the fintech stock.
