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Why Upstart is down double digits today

What happened

Fintech Platform Stocks upstart holdings (UPST -8.32%) fell a lot today, falling about 11.4% at 2:30 pm ET.

There was no major news from the company today, but macroeconomic fears about a recession have started to take over the market. That’s not good for any action, particularly a lender. What’s an even worse stock to own than a traditional lender on a day like this? A new fintech that investors may have come to doubt, due to its short history as a public company.

And that

Upstart investors might say, “Hey! Upstart is not a lender!” Technically, that’s true. However, while Upstart positions itself as a tech-savvy underwriting platform that sells its loans to outside banks and investors, it’s not immune to the lending dynamics. Last quarter, due to rapidly rising interest rates, Upstart’s third-party lending clients, who purchase its loans, pulled back as they recalibrated their risk and return models. That caused Upstart to retain a small portion of its loans on its balance sheet.

The market reaction to that was so bad, with Upstart falling roughly 70% in the immediate aftermath, that Upstart management has since said it will no longer hold loans as a stopgap measure. Rather, it will simply withdraw the subscription if the confidence of loan buyers declines.

It also doesn’t help that Upstart’s underwriting, which is supposed to be superior to traditional loans based on FICO scores, appears to be showing cracks. Last month, Wedbush analyst David Chiaverini downgraded Upstart and lowered his share price target to $15 as he noted that some recent Upstart securitizations were starting to show higher delinquencies.

Also, last week, Upstart wrote in a blog post that it was adding new variables and making changes to its algorithms “during a period of significant economic change.” While Upstart is to be expected to recalibrate its models from time to time, the company appears to be struggling to do so quickly, requesting a waiver to implement changes before they are fully reviewed by the Consumer Financial Protection Bureau (CFPB).

With the Federal Reserve raising the Fed Funds rate yesterday by 75 basis points in a bid to rein in inflation, the biggest increase since 1994, investors are now eyeing a higher probability of a recession. That is affecting all fintechs and not just Upstart, but Upstart is among the biggest losers, likely due to these fears about its algorithm.

Now what

Upstart is now trading at just 19 times final earnings and 12 times future estimates. That obviously seems pretty cheap. Keep in mind, however, that investors don’t have much confidence in those forward-looking estimates, as there is uncertainty about the direction of the economy and Upstart’s underwriting models.

However, if you believe that Upstart’s management team has what it takes to lend prudently even in a very difficult operating environment, then there could be many long-term benefits. Still, Upstart’s financials could show less growth this quarter, and perhaps even see its bottom line earnings fall into negative territory for the next several quarters. Long-term investors should be prepared for a difficult trading environment in the short term.

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