Claim stocks skid as Upstart anxiety weighs on fintech sector

Shares of Affirm Holdings Inc. fell midday Tuesday after another fintech company delivered what one analyst saw as a worrying sign for fintech firms reliant on capital markets.

Upstart Holdings Inc.UPST,
-16.69%,
a fintech company using artificial intelligence in its lending decisions, cut its full-year guidance on Monday evening, acknowledging that the current macroeconomic climate could limit lending volumes and revealing that it is now retaining more loans on its balance sheet as part of a “market release” move.

“We believe the reading is negative for capital markets-dependent fintechs,” Stephens analyst Vincent Caintic wrote in a Tuesday downgrade from Affirm’s AFRM,
-19.57%.
He cut his rating on the company’s buy it now and later paid to an underweight relative to equal weight and cut his price target to $17 from $51.

Shares of Affirm were down 15% in Tuesday trading, while shares of Upstart plunged 60%.

“Imprinting profits from Upstart not only involved higher funding costs, but also the inability to access capital markets, which we are also concerned about for AFRM,” Caintic wrote. “This adds to our expectations for GMV [gross merchandise volume] guide down due to weak electronic communications industry sales.

Caintic now has a “full-lender” multiple of 10 times 2023 estimates for “normalized” earnings per share on shares of Affirm. He made a similar move with shares of Upstart, which he also downgraded to underweight.

“Between the two, we prefer AFRM due to its shorter loan terms to consumers and likely higher payout rate as consumers prioritize Affirm’s payout mechanism over a unsecured loan from Upstart,” he wrote.

Affirm is expected to release its own quarterly results after the May 12 closing bell.

Although Caintic said it would “avoid AFRM in its 1Q22 results”, it made its views as part of a broader appeal. “We’re also broadly negative on capital markets-dependent fintechs, especially those that seem willing to time the market like Affirm and Upstart,” Caintic added.

Morgan Stanley’s James Faucette remains more bullish on Affirm’s stock. He maintained an overweight rating and $80 price target in an earnings preview on Tuesday.

Affirm updated its outlook optimistically in mid-March, but investors are increasingly concerned about the state of e-commerce growth following recent earnings reports from PayPal Holdings Inc. PYPL ,
-4.55%
and Amazon.com Inc. AMZN,
-3.20%,
according to Faucette.

Affirm’s stock has fallen 54.0% over the past month, while the S&P 500 SPX index,
-1.65%
fell by 11.4%.

“As a result, we believe expectations for the AFRM’s outlook have diminished significantly,” Faucette wrote. Its analysis of data and trends indicates that “the company can meet the expectations of 1Q GMV”.

However, investors are likely to be more focused on the company’s outlook than its recent results, he noted.

“Despite the slowdown in e-commerce, discretionary credit spending was strong in the first quarter, suggesting demand for AFRM installment loans may have persisted,” Faucette wrote. “Nevertheless, the macroeconomic uncertainty may leave investors hesitant to extrapolate any Q1 AFRM upside to future quarters, especially as it is difficult to predict the impact of GMV on P&L due to the ‘evolution of AFRM’s volume mix and revenue timing.’