Why shares of Affirm, Upstart and SoFi are falling today

What happened

Shares of several popular fintech stocks continued to tumble today as investors brace for the start of earnings season and new data this week that will provide insight into the current state of inflation .

Shares of Buy Now, Pay Later (BNPL) To affirm (AFRM -8.44%) was trading almost 9% lower in the last hour of trading. Artificial intelligence lender actions Reached (UPST -0.22%) traded down about 1.4%, and digital bank shares SoFi (SOFI -2.91%) traded almost 4% less.

So what

Plenty of new data will be released later this week, including the closely watched Consumer Price Index (CPI), which tracks the prices of everyday goods and services and is one of the ways the market measures inflation. .

Image source: Getty Images.

Last month, CPI data showed the index rose 8.6% in May on an annual basis, which is more than investors had previously expected. It also challenged some investors’ earlier belief that inflation had peaked, which is being watched very closely by the market. June CPI data will be released on Wednesday, and economists expect the CPI to be higher than in May, potentially nearly 9% higher year-over-year.

This is problematic because the longer inflation persists, the more aggressive the Federal Reserve will have to be in terms of monetary policy and raising interest rates. Rate hikes have already proven to be a huge problem for tech and fintech stocks, which have sold off intensely this year.

For Upstart and Affirm, higher rates raise several important issues. They could increase loan losses because the cost of debt rises for the consumer. But they also raise funding issues because, as investors become more concerned with the economy, they are less likely to buy and fund loans, which is what, at least partially, the business model of Upstart and Affirm.

Earlier this morning, Goldman Sachs analyst Michael Ng downgraded his rating on Upstart from “neutral” to “sell” and cut his price target significantly from $40 per share to $14.

“While UPST’s penetration of approximately 9% in the U.S. personal loan market through 2021 has been impressive, we believe the recent slowdown in revenue creation and growth is evident due to a increased competition and an increase in funding costs for UPST partners, which reduces visibility on long-term growth and equity gains beyond 2023 that have historically justified the premium valuation of UPST compared to its peers,” Ng said in a research note.

He added: “Slowing growth and loss of confidence in UPST’s credit underwriting differentiation will likely catalyze a further downgrade in UPST’s valuation to bring it more in line with its lending peers. .”

Now what

Unfortunately, rising interest rates are a big deal for Upstart and Affirm, and we could see another 0.75% hike later this month as well as more rate hikes later this year, this which could keep this problem prevalent. For this reason and given the uncertainty surrounding inflation, I cannot recommend buying either of these two fintech stocks at this time.

However, I’m much more bullish on SoFi. Although its valuation is still high, SoFi has recently become a bank, which offers it lower-cost deposits to fund set-ups. It also serves borrowers with much higher credit quality, who should be more resilient in a rising rate environment and potential recession. SoFi is definitely my favorite stock out of these three right now.

Bram Berkowitz has no position in the stocks mentioned. The Motley Fool holds positions and recommends Affirm Holdings, Inc., Goldman Sachs, and Upstart Holdings, Inc. The Motley Fool has a Disclosure Policy.

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