Why shares of Affirm, SoFi and Upstart are falling today

What happened

Shares of several popular tech stocks fell today after new inflation data showed that inflation may not have fallen as quickly as investors thought in August. The Nasdaq Compound had fallen more than 4% at the time of this writing.

Shares of Buy Now, Pay Later (BNPL) To affirm (AFRM -8.55%) was trading down more than 9% at 11:32 a.m. ET today. Digital banking actions SoFi (SOFI -7.46%) was trading down 7%, and shares of the artificial intelligence lender Reached (UPST -8.71%) also fell by more than 9%.

So what

Earlier this morning, the US Bureau of Labor Statistics (BLS) released the latest August data for the Consumer Price Index (CPI), which tracks the prices of a basket of everyday consumer goods and of price. Investors use the CPI as a way to gauge inflation.

Image source: Getty Images.

In August, the CPI rose 0.1% from July and rose 8.3% year-on-year. Economists forecast the CPI to fall 0.1% from July and an 8% increase year-on-year.

The higher-than-expected report comes despite energy prices falling 5% in August. In energy, gasoline prices fell 10.6%. But other prices have remained high – and in some cases have risen. Medical care services rose 0.8% from July, the largest monthly increase in six months. House prices also rose 0.7% in August, also representing the category’s largest monthly increase since February, mainly due to high rental prices.

“Today’s CPI reading is a stark reminder of the long road we have until inflation comes back to earth,” said Mike Loewengart of by Morgan Stanley Global Investment Office, according to CNBC. “The optimistic expectations that we are on a downward trajectory and that the Fed will lay off the gas may have been a bit premature.”

The CPI report essentially confirms that the Federal Reserve will likely raise interest rates by 0.75% at its next meeting later this month. It would be the third consecutive such decision by the Fed.

Rising interest rates have really hurt tech stocks this year as they make the cost of doing business more expensive and the cost of debt higher. They could ultimately lead to slower growth and lower profitability, which would ultimately decrease the value of future cash flows.

For high-flying tech stocks like Affirm, SoFi and Upstart that were trading at astronomical valuations last year, there was very little room for error, so once it became clear the Fed would be aggressively raising rates, these stocks also sold off intensely.

The higher rates have also been a headache for Upstart in terms of funding loan growth. Investors have been less willing to fund and purchase Upstart’s loans due to a higher cost of funding and a more uncertain economic outlook. Affirm has also seen its loan loss rates rise this year as stimulus programs have ended and rates have risen.

Now what

The possibility of inflation lasting longer and rates continuing to climb longer is the exact opposite of what tech investors were hoping to glean from the CPI report today.

For now, I continue to avoid Upstart and Affirm as rising rates may continue to wreak havoc on their business models.

They will also impact SoFi, but likely to a lesser extent, as the digital bank lends to a higher quality lending base that should be more resilient in a deeper downturn. Additionally, as a bank, SoFi should enjoy higher rates because it can charge more interest on loans and has more stable sources of funding to support loan growth.

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

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