Why Upstart, Affirm and MercadoLibre have mobilized today

What happened

Stocks of fintech and e-commerce related stocks Reached (UPST 2.88%), To affirm (AFRM 10.76%)and MercadoLibre (MELI 5.25%) were up today, up 2.9%, 10.8% and 5.3%, respectively.

There wasn’t much company-specific news today fueling these stocks, but it appears that after several consecutive weeks of declines, the most dejected segments of the market, including high-tech tech stocks growth and fintech see are linked. MercadoLibre also received good news individually, as a major competitor announced that it would withdraw from some of its markets.

Today’s big gains could have been enhanced by short hedging, with many institutional funds positioned against these names amid the dual threat of rising long-term bond yields and potential recession as the Federal Reserve rises. rates.

However, this week has seen some positive data points on these fronts, with some inflationary indicators easing and the labor market remaining resilient. When combined with battered stock prices, this is a recipe for big upside moves today.

So what

These shares had been selling since mid-August on fears that inflation and interest rate hikes could lead to a recession, and therefore credit losses among lenders.

Upstart is an AI-powered lending platform for personal and auto loans to buyers with relatively low FICO scores, and its models have been tested this year. Upstart’s 2021 vintages showed increased charges as inflation weighed on consumers’ discretionary income, although management said it adjusted its models in 2022. the market amid macroeconomic uncertainty, the requiring it to hold certain loans on its balance sheet and increasing its risk.

Affirming, as a buy now, pay later platform for point-of-sale purchases of large items, also carries underwriting risk. In the recent earnings release, Affirm noted a more “normalized” credit environment with increased write-offs and loan loss provisions. Yet after the extraordinarily low charges during the pandemic and the stimulus payments, the company is still achieving good net interest margins.

While MercadoLibre is known as Latin America’s leading e-commerce site, its Mercado Pago fintech segment is rapidly becoming more prominent, with much of Mercado Pago’s recent growth coming from merchant and consumer lending. MercadoLibre’s credit portfolio grew 230% year-over-year last quarter, which could worry investors who prefer a cleaner, paying business.

While credit concerns have weighed on each of these names, the reversal of those concerns is pushing every stock higher today. The precise reason is a little hard to pinpoint; however, earlier this week continued U.S. jobless claims came in below expectations, which may have eased fears that the Federal Reserve could push the economy into recession. Oil prices also fell during the week, although they are up today. Meanwhile, other inflationary indicators such as shipping rates and used car prices are in full deflation, with prices falling in August.

If inflation falls faster than expected, the Federal Reserve will not have to tighten financial conditions as much. Given the extent to which these economically sensitive stocks fell on recession fears, they soared on relatively good news from very low levels.

MercadoLibre may also increase in response to news that the competitor Sea Limited leaves certain Latin American markets. Sea Limited became a fierce e-commerce competitor in Brazil, but announced it would pull out of Argentina, Chile, Colombia and Mexico due to cash burn issues. This should benefit MercadoLibre, which has established operations in these countries.

Now what

These stocks were each down significantly 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 high at the start of the year, and the macroeconomic environment turned strongly against each of them.

However, we are now in a period where these stocks could bottom or hover lower. If conditions improve, these growth stocks could be among the big winners; however, it is the reward investors get for taking on those bigger risks, which are by no means conquered yet. Investors will get more data next week, when the August Consumer Price Index report is released on Tuesday, September 13.

Billy Duberstein has positions in Sea Limited and has the following options: January 2024 $50 short put options on Sea Limited, September 2022 $55 short put options on Sea Limited and September $95 short call options 2022 on Sea Limited. Its clients may hold shares of the companies mentioned. The Motley Fool holds positions and recommends Affirm Holdings, Inc., MercadoLibre, Sea Limited and Upstart Holdings, Inc. The Motley Fool has a Disclosure Policy.

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