What happened

Shares of fintech stocks Upstart (NASDAQ: UPST), Affirm (NASDAQ: AFRM), and SoFi (NASDAQ: SOFI) were in crash mode today, with each down between 8% and 9% as of 2:27 p.m. ET.   

Lately, these beaten-down fintech stocks have been among the most volatile to both the upside and the downside, and their movements are largely based on macroeconomic news.

Today happened to be a big down day in the market following yesterday's big rally, as interest rate and recession fears, along with perhaps some end-of-quarter liquidations by hedge funds, likely played a role in their synchronous decline.

So what

Stocks have been in free fall in September, especially technology growth stocks following a recent spike in long-term Treasury bond yields, and fintech stocks appear to be caught up in the selling.   

Young, high-growth fintech stocks appear to be seen as a risk-on trade by investors, and investors are fleeing risk today amid so much global uncertainty. Today, U.S. jobless claims came in lower than expected, reflecting the very tight job market and potentially fueling "sticky" inflation. That could spur the Federal Reserve to continue hiking interest rates at a rapid pace.

If inflation and interest rates continue their rapid rise, higher interest rates may actually help some mature, profitable banks with low funding costs, but smaller, unprofitable fintechs will likely see their value diminish, since their profitability is still well into the future.

On the other hand, there is also another danger that central banks "overdo it" in their fight against inflation, pushing rates higher until we have a broad recession. That could lead to joblessness and higher charge-offs for loans. Investors will likely also take a skeptical stance with these three stocks, as they don't have as long a history of underwriting as large, older banks. This is especially true for Upstart, which claims its AI models are a new and better way to underwrite loans than traditional FICO scores.

Fintech stocks also have the problem of funding their loans when rates rise. Large, national banks such as Bank of America (NYSE: BAC), for instance, can charge very low deposit rates due to their size, national scale, and recognizable brand. That allows them to generate lots of leverage in net interest income as rates rise, as they can charge higher interest rates without having to raise deposit rates as much. 

That's not the case with fintechs. For instance, Upstart had to resort to using its balance sheet this year to fund some of its loans. That was a departure from its initial business model of selling all loans to third-party banks and credit unions, as loan buyers balked when interest rates rose rapidly.

For its funding, Affirm relies on warehouse facilities, securitizations, and other forward-flow commitments. These are generally higher-rate options than bank deposits.

Yet even SoFi, which acquired a bank charter earlier this year that gave it access to deposits, has had to raise its deposit rate APY up to 2% as of August, up from 1.5% as recently as June, in order to attract depositors.

Basically, the smaller you are and the earlier you are in your corporate life as a financial company, the higher your funding costs will be relative to large institutions. That tends to put these companies further out on the risk curve, which opens them up to charge-offs.

Now what

With these stocks down so much from their highs, between 82% and 95%, they could have substantial upside if the economy avoids a recession and interest rates moderate. However, there is significant uncertainty on those fronts, with most economists skeptical the Fed can engineer a "soft landing."

Thus, these former highfliers remain high-risk, high-upside bets that a recession will either be avoided or that it will be shallow and mild. They remain appropriate only for investors comfortable making volatile, high-upside bets that could also yield very big losses.     

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why US Fintech stocks crashed today appeared first on The Motley Fool Australia.

The Nasdaq Composite Index (NASDAQ: .IXIC) is cranking on August 10, 2022, up 2.4% at 12:53 p.m. Today's big gains come as earnings season continues and following the release of the latest inflation data from the U.S. Department of Labor this morning. According to the data, the Consumer Price Index, or CPI, rose 8.5% in July. For context, that's still near the highest levels of the past four decades, but it's trending very much in the right direction after June's 9.1% set a 41-year high.

Today, investors are betting that slowing inflation is a good signal that a sharp recession is less likely. Energy and food prices are moderating, and many companies are still reporting upbeat quarterly results and expectations. Upstart (NASDAQ: UPST) and Affirm Holdings (NASDAQ: AFRM) are at the leading edge of that consumer risk, and their highly volatile stocks are up big today on the optimistic reading of the inflation data.

Today's noteworthy postearnings gainers include The Trade Desk (NASDAQ: TTD), with shares up more than 36% at one point. Investors are also betting on better prospects for renewable and low-carbon energy companies. Shoals Technologies (NASDAQ: SHLS) and Plug Power (NASDAQ: PLUG) are two of those up big today.

When near-record inflation is a "good" thing

While the CPI is still very high, today's interpretation of the data was generally positive. We have seen energy and food prices begin to come down, and some areas of the global supply chain crisis are improving, too. Semiconductor companies, in particular, are reporting that the cycle in that industry is turning from too much demand to too much supply in certain product categories. While that's not a positive for shareholders in the short term, it's positive for the broader economy that the supply shortfall that's kept many products off the shelves and prices very high might be starting to ease.

Investors see this as very positive for Upstart, the AI-driven consumer lending platform, and for buy now, pay later specialist Affirm Holdings, with their shares up 16% and 13%, respectively, at this writing. Both companies live at the leading edge of consumer credit risk. By and large, the bulk of their lending products are unsecured consumer debt (though Upstart is diversifying into auto lending), which is the first kind of credit to see increased rates of default in weak economic periods. However, today's gains could prove temporary, as both saw their stocks fall sharply earlier this week on earnings and economic speculation.

The Trade Desk's second quarter was, by almost every measure, exceedingly strong. It reported 35% revenue growth, continued to retain more than 95% of its customers, and more than doubled its operating cash flows. If there's one not-great number, it's stock-based compensation, which almost tripled year over year and was the primary factor in The Trade Desk reporting a GAAP loss.

What happens next? Plenty of volatility as investors try to telegraph what happens in the near term. Investors in both companies should be prepared for that and acknowledge that their risks will be amplified if consumers continue to get squeezed. The companies' long-term prospects, however, are tied to their ability to keep disrupting the traditional credit card and consumer lending industries.

The Trade Desk shakes off earnings woes for adtech

The Trade Desk's results were a breath of fresh air for the adtech industry. In recent weeks, many of the companies that are deeply involved in the growing digital ad industry have reported somewhat mixed results. The mature giants like Facebook parent Meta Platforms (NASDAQ: META) have reported strong ad volume but falling ad rates, as marketers have cut ad spending.

Investors seem happy to trade a portion of equity to co-founder and CEO Jeff Green, however, as part of his compensation. Shares are up a massive 36% at this writing.

Cleantech stocks cleaning up today -- can they keep it up?

The stocks of a number of clean energy companies are up big today. Shares of Shoals Technologies, which makes electrical wiring for utility-scale solar plants, are up 14% today, joining hydrogen companies Plug Power and Bloom Energy (NYSE: BE). The latter's shares are up more than 15% after Bloom reported expectations-beating earnings and said it expects to be cash flow positive for the full year.

Plug Power reported on August 9. Unlike Bloom, its results came up short of expectations. However, analysts continued to have bullish outlooks, raising their price targets on the company, partly due to the expected tailwinds of the recently passed landmark federal climate legislation.

Looking beyond near-term price targets and potential tailwinds from the new climate law, investors should focus on the financials. Plug Power has a very long record of cash burn (it has never had a positive-cash-flow year in its multidecade history), while Shoals and Bloom have demonstrated positive cash flows in the past and are trending in positive directions.

Optimistic thinking is nice, but as investors, we mustn't forget that long-term wealth comes from a healthy -- growing -- bottom line.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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A bear market occurs when the price of an asset or index falls by 20% (or more) from its all-time high. In the stock market's case, this occurs every 3.6 years on average. In 2022, both the benchmark S&P 500 index and the technology-centric Nasdaq 100 index have crossed the bear-market threshold. The selling has been broad and relentless, especially for tech stocks, many of which have lost more than 50% of their value. But for long-term investors, that has created some interesting opportunities. 

These three companies are currently worth between $900 million and $2 billion, but they each have the potential to amass valuations of $5 billion by 2030. That opens the door to a significant amount of upside for investors. Here's why.

1.Upstart: implied upside of 144%

Upstart Holdings (NASDAQ: UPST) is an artificial intelligence company that is changing the way banks assess potential borrowers. It says its algorithm can deliver loan decisions faster and more accurately than traditional methods of assessment, which have historically relied on Fair Isaac's FICO credit scoring system. 

Upstart has originated $25 billion worth of loans for its 60 bank and credit union partners since it started out, and it earns fees for doing so. But the company just entered the automotive loan segment, which is worth about $751 billion in originations annually, so it has only tapped a small slice of its potential so far. What's more, Upstart could be eyeing business loans and mortgages in the future, which would take its opportunity to $6 trillion each year. 

Upstart is showing exceptional growth, increasing its revenue by a whopping compound annual rate of 96% between 2017 and 2021. But it's set for a slowdown after cutting its 2022 revenue guidance amid challenges like rising interest rates and a weakening economy, though neither of these issues are likely to last for the long term. 

Upstart stock has taken investors on a rollercoaster ride. After listing publicly in December 2020 at $20 per share, it rose by over 20 times to an all-time high of $401 before crashing back to Earth, now trading at $24 per share. It has a $2 billion market valuation at the moment, so its stock price would need to rise by 144% to $59 in order to reach a $5 billion valuation by 2030. 

That's only a fraction of Upstart's all-time high, and considering the company's potential, that goal seems very achievable by 2030. 

2. Lemonade: implied upside of 323%

Lemonade (NYSE: LMND) is another financial technology company using artificial intelligence to transform an age-old industry -- this time, insurance. The company has developed a web-based bot that can interact with customers to write a quote in under 90 seconds, and pay claims within three minutes -- all without human input in most circumstances.

In the two years between the first quarter of 2020 and the recent first quarter of 2022, Lemonade has more than doubled its customer base to 1.5 million, and more than tripled its in-force premium from $133 million to $419 million. It comes on the back of the company's entrance into the car insurance market, its newest and potentially most lucrative segment. It could be worth over $316 billion in the U.S. during 2022 alone, from a pool of 198 million policyholders. 

Yet despite Lemonade's strong growth, its stock has collapsed by 88% from its all-time high, and its market valuation now sits at a modest $1.1 billion. The company is losing quite a bit of money as it builds scale and expands its business, and investors have expressed little patience for this process amid the broader tech sell-off. But as the economy improves, so should the appetite for high-growth stocks.     

Lemonade had a market valuation of about $10 billion at its all-time high stock price, so it would have to regain half of that level to reach $5 billion. It has the potential and the growth rate to achieve that by 2030, and if it does, it would deliver investors a return of 323%.

3. Redfin: implied upside of 455%

In an economic environment where interest rates are rising, real estate prices will typically fall, so buying Redfin (NASDAQ: RDFN) stock is a contrarian play. But the company might be the future of the industry, and it's too cheap to ignore right now.

Redfin has built an army of 2,750 real estate brokers across the U.S., and it represents 1.18% of all home sales by value. That significant scale allows the company to charge listing fees as low as 1%, far cheaper than the industry-standard 2.5%. Since Redfin started, it has saved sellers over $1 billion. 

The company also operates an iBuying segment that purchases homes directly from willing sellers, then attempts to flip them for a profit. It's a risky practice especially if real estate prices are falling, and it dealt a catastrophic blow to Redfin's key competitor Zillow Group (NASDAQ: Z)(NASDAQ: ZG) last year. Thankfully, Redfin's iBuying business is much smaller, and it appears to have behaved less aggressively when acquiring properties, so there are no signs it will suffer a similar fate at this stage.

Redfin's stock once traded at $96.59, but it has fallen 91% from that level to $8.43 today. That places its current valuation at just $900 million -- less than half of its 2021 full-year revenue of $1.9 billion. In 2022, analysts expect revenue will grow further, to $2.5 billion. 

Redfin stock would need to rise 455% to $47 in order to amass a $5 billion valuation, and there's a case that it might be there right now if not for the uncertainty in the real estate market. But that won't last forever. As long as Redfin continues to grow steadily over the next eight years, it should find the target very achievable. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Prediction: These tiny growth stocks could be worth $5 billion by 2030 appeared first on The Motley Fool Australia.

What happened

Shares of several consumer fintech companies fell today after the popular artificial intelligence lender Upstart (NASDAQ: UPST) disappointed the market with its latest earnings results and guidance.

Shares of buy now, pay later company Affirm (NASDAQ: AFRM) were trading nearly 16% lower as of 12:09 p.m. ET today, shares of the one-stop financial services company SoFi (NASDAQ: SOFI) were trading nearly 18.5% lower, and shares of the digital marketplace bank LendingClub (NYSE: LC) were trading about 9% lower.

So what

Last night, Upstart reported adjusted diluted earnings per share of $0.61 on total revenue of $310 million for the first quarter of 2021, both numbers that beat analyst estimates. However, Upstart also lowered its revenue guidance for the full year from $1.4 billion to $1.25 billion. The stock plummeted and as of this writing had fallen roughly 60%.

While the company increased its contribution margin guidance, it also lowered its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance for the full year. Additionally, Upstart earlier this year guided for $1.5 billion of auto loan originations in 2022, but now it seems that goal may be in question as well.

Over the past few months, the Federal Reserve has raised its benchmark overnight lending rate aggressively, by 0.75% in two meetings, sparking concerns among investors that it might tip the economy into a recession. Upstart is currently in the business of originating online personal and auto loans to a range of borrowers across the credit spectrum. These kinds of debt are often some of the first that consumers will stop paying down when they start to face financial pressure. Already, Upstart has seen default trends normalize as help from stimulus has gone away. 

With all these concerns, Upstart's partners that actually fund and invest in Upstart loans have asked for higher returns, as there is now a higher likelihood that consumers will default in the future and as investors are facing their own higher funding costs. This has resulted in Upstart having to raise pricing on its platform for borrowers. Higher interest rates may also push out of qualification some borrowers who qualified for certain loans based on certain investors' risk appetite. All of this will result in lower loan transaction volume and lower conversion rates, which is how Upstart generates the large majority of its revenue.

Upstart also had to hold a small portion of loans that it normally sells to investors on its balance sheet in the first quarter, which spooked investors. That's because some of Upstart's investors, particularly those in the capital markets, are still determining what kind of risk they want to take on, which has resulted in a lack of funding for Upstart loans. Upstart's management has said this is temporary, but the company is supposed to act as a marketplace, and if funding in the capital markets dries up, that would be extremely problematic for future growth.

Now what

Affirm, SoFi, and LendingClub seem to be taking the hit because the market is clumping all these consumer fintech lenders together with Upstart. In Affirm's case, I can understand the concerns because the company is also somewhat beholden to the capital markets to fund and take on a large portion of its loans.

But I don't think LendingClub and SoFi deserve to be clumped in here because both now have bank charters. Bank charters give them access to cheaper deposits, which they can use to fund a large portion of their loans, making them much less reliant on the capital markets.

Additionally, while Upstart originates loans to borrowers all over the credit spectrum, LendingClub and SoFi lend more heavily to prime borrowers and above, who were less affected by stimulus funds and are in much better financial shape. SoFi will report earnings results for the first quarter of 2022 after the market closes today.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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