We recently compiled a list of the 10 Worst Artificial Intelligence (AI) Stocks To Buy According to Financial Media. In this article, we are going to take a look at where Upstart Holdings Inc. (NASDAQ:UPST) stands against the other AI stocks.

Is a 0.5% Rate Cut Aggressive?

Analysts have long predicted interest rate cuts and the Fed just lowered rates by 0.5% on September 18th. This is the first rate cut since the pandemic, driven by concerns about the labor market, and was followed by market volatility. The new benchmark rate is between 4.75% and 5.0%, with more cuts expected. Fed Chairman Jerome Powell stated that these cuts are based on economic data, not political factors.

We have had several analysts supporting or opposing the 50 basis-point rate cut, both before and after the announcement was finally made. We recently discussed the President at Potomac Wealth Advisors, Mark Avallone’s, stance on this aggressive decision made by the Fed. Here’s an excerpt from our article on the 10 Worst Small Cap AI Stocks To Buy According to Short Sellers, that covered his opinion:

“Mark Avallone expressed surprise at the Fed’s decision but emphasized that investors shouldn’t make impulsive decisions, but rather utilize potential opportunities in small and mid-cap stocks, which he believes will benefit from a lower interest rate environment…. Avallone warned investors to be cautious with traditional banks, especially mid-sized and large ones, based on his experience at Bank of America. He believes that the recent changes in loan pricing after the Fed’s rate cut would hurt banks’ overall revenue and income from interest…. He suggested that it may be too late for significant moves in fixed-income investments, as many investors have already lengthened their bond durations. He recommended pausing further adjustments until it’s clear whether the rate cut is due to an economic slowdown or a preemptive action.”

After announcing that the Central Bank has lowered interest rates by half a point, Fed Chair Jerome Powell took questions from reporters regarding this first-ever cut decision since 2020. He emphasized their commitment to timely monetary policy adjustments, particularly in light of the current economic landscape. The Fed believes they aren’t behind the curve, and the decision to cut rates reflects a strong commitment to avoid falling behind.

In response to a question about whether the rate cut was influenced by recent employment data or the high nominal level of the federal funds rate, he clarified that their policy position was established in July 2023, a period characterized by high inflation and low unemployment. He highlighted their patience in reducing the policy rate, noting that other central banks had already implemented multiple cuts while the Fed had refrained from such actions until now. This patience has reportedly paid off, as there is now greater confidence that inflation is trending sustainably toward the 2% target.

Powell indicated that the recent rate cut should not be interpreted as a new pace for future adjustments but rather as part of a recalibration of policy toward a more neutral level. He referred to the Summary of Economic Projections (S.E.P.) as a guide for understanding potential future cuts, emphasizing that economic developments could lead to adjustments in either direction.

When asked about implications for balance sheet policy following this larger rate cut, he noted that reserves within the banking system remain stable and abundant. He clarified that there are no plans to halt balance sheet runoff as a result of this decision, indicating that both monetary policy easing and balance sheet management can occur concurrently.

With a lower interest rate environment, investors everywhere are looking to either make a decision about their current AI stock holdings or diversify their portfolios with a higher ratio of AI stocks. But how has the September cut really impacted the AI sector? The Futurum Group Chief Market Strategist, Cory Johnson, just discussed what Fed rates mean for the tech sector as they invest more into artificial intelligence.

The recent decision by the Fed to lower interest rates has initiated a ripple effect in the tech sector, which can lead to increased tech spending and potentially larger venture capital investments. Corey Johnson noted that the current environment is favorable for tech stocks.

Johnson pointed out that there had been a reset in tech stocks when the Fed was not pivoting as quickly as investors would have liked. However, with the recent cut, there seems to be a renewed coupling between tech stocks and market sentiment. Even a reduction of 50 basis points can ease borrowing and spending, leading to increased M&A activity. He said this trend will likely result in heightened investments in technology, particularly AI.

He also highlighted how lower interest rates could accelerate the shift towards AI computing by making capital more accessible for companies looking to invest in this area. Johnson mentioned that as rates decrease, expected returns on investments look more attractive, especially in growth sectors like tech. This shift could lead to greater confidence among companies to invest in AI.

As for venture capital, Johnson noted that there is significant activity in the Bay Area, particularly with semiconductor startups. He observed that many new projects have been announced recently, indicating a robust interest in this sector. Interestingly, he pointed out that securing funding often happens before a product is fully developed so investors are increasingly focused on assembling the right teams rather than just having a finished product.

Overall, Johnson’s insights reflect a positive outlook for tech spending and venture capital investment in light of the Fed’s rate cuts, particularly within the AI and semiconductor sectors. As companies adapt to changing financial conditions, Powell’s discussion of the Fed’s strategic approach presents investors with both opportunities and challenges. We’re here to help you navigate the situation better with a list of the 10 worst artificial intelligence (AI) stocks to buy according to financial media.

Methodology

To compile our list, we sifted through rankings of AI stocks on different financial media websites to compile a list of 20 possible AI stocks. We then selected the 10 stocks that were the least popular among elite hedge funds and that analysts were bearish on. The stocks are ranked in descending order of the number of hedge funds that have stakes in them, as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Upstart Holdings Inc. (NASDAQ:UPST)

Number of Hedge Fund Holders: 18

Upstart Holdings Inc. (NASDAQ:UPST) is a financial company and an AI lending platform that partners with banks and credit unions to provide consumer loans using non-traditional variables, like education and employment, to predict creditworthiness. This allows it to offer loans to a broader range of borrowers, including those who may be underserved by traditional lenders.

The company has made significant AI model wins, revamped its funding supply, and increased operating efficiency. All of these factors together generated a revenue of $127.63 million in Q2. However, this revenue recorded a 5.99% year-over-year decline. Revenue from fees was down 9% due to higher pricing for prime loans.

However, loan transactions increased 31% year-over-year in Q2, reaching 144,000. New borrowers increased 21% sequentially. The average loan size decreased to $7,700 due to growth in small-dollar loans and again the higher pricing on prime loans.

It recently launched a major improvement to its credit pricing model. The new model, M18, incorporates the Annual Percentage Rate (APR) as a feature. M18 generates ~1 million predictions for each applicant, marking progress in AI-based modeling.

The company automated 91% of core unsecured loans, up from 73% two years ago. Automation is essential for cost efficiency and a better product. It’s expanding into auto loans, small-dollar relief loans, and home equity lines of credit.

Its HELOC product (Upstart’s Home Equity Line of Credit ), available in 30 states, covers 51% of the US population, with an instant approval rate of 42%, up from 36%, allowing applicants to avoid document uploads. HELOCs have zero defaults to date.

Upstart Holdings Inc. (NASDAQ:UPST) is focusing on core personal loan product, which offers significant growth potential. The product has improved significantly in recent years, with advancements in model accuracy, fraud detection, automation, funding resiliency, acquisition costs, and revenue optimization.

Here is what Vulcan Value Partners has to say about Upstart Holdings Inc. (NASDAQ:UPST) in its Q2 2022 investor letter:

“Upstart Holdings Inc. was a material detractor for the quarter. It was a mistake, and we sold our position. Upstart is an artificial intelligence (AI) and cloud-based lending platform. The company uses AI models that are designed to underwrite superior loans with lower interest rates, lower default rates, higher approval rates, and increased underwriting automation. When we purchased Upstart, we believed the company had an excellent product and the addressable market was large.

Upstart’s results during 2021 were impressive. In the first quarter of 2022, the company reported solid results but lowered guidance and, more importantly, used its balance sheet to warehouse loans temporarily. The company’s decision to use its balance sheet to finance its growth surprised us and other market participants, and its stock price decreased dramatically. While we admire the management team, we are less confident in the company’s long-term prospects.

It will be more difficult than we anticipated for Upstart to extend its competitive advantages with smaller banks into adjacent markets such as auto loans and mortgages. As a result, our value for Upstart is unstable and the company no longer qualifies for investment. We are following our discipline and reallocating capital into companies with more stable values.”

Overall UPST ranks 4th on our list of the worst AI stocks to buy according to finance media. While we acknowledge the potential of UPST as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than UPST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.