Why Upstart, Affirm and MercadoLibre came together today

What happened

Stocks of fintech and e-commerce related stocks upstart (UPST 2.88%), Confirm (AFRM 10.76%)and MercadoLibre (MELI 5.25%) rebounded 2.9%, 10.8% and 5.3% today respectively.

There wasn’t much company-specific news driving these stocks today, but it appears that the hardest-hit parts of the market, including high-growth technology and fintech stocks, are bound after several consecutive weeks of decline. MercadoLibre also received some good news when a major competitor announced that it was exiting some of its markets.

Today’s big gains could have been enhanced by short-covering as many institutional funds are positioned against these names amid the twin threats of rising long-term bond yields and a potential recession if the Federal Reserve hikes rates.

This week, however, saw some positive data points on those fronts, with some inflation indicators slipping and the labor market remaining resilient. This, combined with depressed stock prices, is a recipe for big upside today.

so what

These stocks have sold off since mid-August amid fears that continued inflation and interest rate hikes would lead to a recession and lender defaults.

Upstart is an AI-powered personal and auto loan platform for buyers with relatively low FICO scores, and their models were tested this year. Upstart’s 2021 vintages showed increased depreciation as inflation hit consumer discretionary earnings, although management said it adjusted its models in 2022. Additionally, since Upstart’s model was to sell its loans to third parties, it was under pressure when its loan buyers withdrew from the market amid macroeconomic uncertainty, forcing it to keep some loans on its balance sheet and increasing its risk exposure .

As a “buy now, pay later” platform for purchasing high-volume items at the point of sale, Affirm also poses insurance risks. In its most recent earnings release, Affirm noted a more “normalized” credit environment, with increasing writedowns and provisions for loan losses. Despite extraordinarily low depreciation during the pandemic and stimulus payments, the company is still earning healthy net interest margins.

While MercadoLibre is known as Latin America’s leading e-commerce site, the fintech segment Mercado Pago is rapidly gaining prominence, with much of Mercado Pago’s recent growth coming from both merchant and consumer credit. MercadoLibre’s loan book grew 230% year over year last quarter, potentially causing some confusion among investors who prefer a clean, fee-based business.

As credit worries have weighed on each of these names, the reversal of those worries is propelling each stock higher today. The exact reason is a bit difficult to pin down; However, earlier this week ongoing US jobless claims came in lower than expected, possibly assuaging fears that the US Federal Reserve is pushing the economy into recession. Oil prices also fell this week, although they rose today. Meanwhile, other indicators of inflation such as shipping costs and used car prices are in outright deflation, with prices falling in August.

If inflation falls faster than expected, the Federal Reserve will not have to tighten funding conditions quite as much. Given how far these economically sensitive stocks had fallen on recession fears, they rallied from very low levels on the relatively good news.

MercadoLibre could also rise in response to this competitor’s news sea ​​limited exits certain Latin American markets. Sea Limited has become a fierce e-commerce competitor in Brazil, but announced it was pulling out of Argentina, Chile, Colombia and Mexico due to cash burn issues. MercadoLibre, which has set up branches in these countries, should benefit from this.

What now

These stocks are each down sharply over the year, with MercadoLibre down 31%, Affirm down 76%, and Upstart down 82%. The sell-offs were probably deserved as each stock traded very expensive at the start of the year and the macro environment turned sharply against both.

However, we are now in a phase where these stocks may find a bottom or overshoot to the downside. Should conditions improve, these growth stocks could be among the bigger winners; However, that’s the reward investors get for taking these bigger risks that are far from over. Investors will have more data next week when the August CPI report is released on Tuesday, September 13th.

Billy Duberstein has positions in Sea Limited and has the following options: short January 2024 $50 puts on Sea Limited, short September 2022 $55 puts on Sea Limited and short September 2022 $95 calls on Sea Limited. Its customers may own stocks of the named companies. The Motley Fool has positions in and recommends Affirm Holdings, Inc., MercadoLibre, Sea Limited, and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

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