Why Upstart Stock (UPST) Lost 31% in September
Shares of Upstart (NASDAQ: UPST) experienced a significant pullback in September, declining by 31%. This downturn was fueled by concerns surrounding potentially rising delinquency rates on the company's loans and general weakening in the broader economy.
Investor Skepticism and Market Research
While Upstart did not release any direct reports, investors reacted to third-party market research and news indicating potentially poor loan performance. This skepticism aligns with broader concerns about a weakening economy, including a notable slowdown in the labor market.
Investors are also wary of a repeat of 2022, when the stock plummeted as growth stalled and profits turned into losses. While that earlier downturn was triggered by rising interest rates, a different set of risk factors is driving current market concerns. The drop of other fintech stocks, including those in the Buy Now Pay Later (BNPL) sector, signals a widespread aversion to credit risk. The current issues seem to be stemming from defaults in lower-income auto loans and the possibility of general consumer economic stress.
Key Events Contributing to the Decline
- Auto Industry Bankruptcies: A pair of auto industry bankruptcies spooked credit markets during September, creating a ripple effect across the financial sector.
- Analyst Error: An analyst mistakenly reported a spike in Upstart's delinquencies for August. Though retracted, this initial report contributed to investor anxiety.
- Tricolor Holdings Bankruptcy: Upstart's worst trading day in September coincided with the bankruptcy of Tricolor Holdings, a used-car dealer specializing in lending to borrowers with no credit. Fraud also contributed to Tricolor's bankruptcy and exacerbated concerns about credit quality in the auto sector.
- First Brands Bankruptcy: Toward the end of the month, First Brands, an auto-parts maker, also filed for bankruptcy, adding to fears about auto loan delinquencies.
The Path Forward for Upstart
The true impact of the changing credit market on Upstart remains unclear, as the company has not yet released official statements on the matter. While management participated in a Goldman Sachs conference on September 9, they did not address any material changes in credit quality or delinquency rates.
It's worth noting that Upstart's second-quarter results were strong, and its guidance for the third quarter was also positive. If the company's performance remained robust throughout the third quarter, the stock may be poised for a potential rebound. Any further insight into the nature and cause of the delinquency concerns will be the key to establishing future viability for investors.
Whether the sell-off in Upstart is warranted based on the company's internal data remains to be seen, with the next earnings report potentially offering much-needed insight.
