Upstart’s AI Stock Frenzy Fades as Market Retreats
The rapid rise and subsequent fall of online-lending firm Upstart Holdings Inc. highlight the risks associated with stocks driven by artificial intelligence (AI) enthusiasm. Upstart experienced a surge in its share price earlier this year, reaching a peak of 445% amid the AI hype. However, its market value has since plummeted by 50%, underscoring the challenges companies face in meeting lofty expectations.
While AI is undoubtedly a popular innovation with the potential to change the world, it does come with certain risks. The recent cooling of animal spirits in the stock market, partly due to speculation about interest rate cuts by the Federal Reserve, has led investors to withdraw from riskier, high-valuation stocks. Upstart is not the only company struggling to live up to these elevated expectations. Software maker C3.ai Inc. had also experienced significant gains earlier this year but has since lost about a third of its value. This volatility highlights the stakes for AI-inflated stocks, attracting both retail traders and short sellers.
However, it is crucial to differentiate between companies caught up in the AI hype due to their association with the technology and those directly benefiting from increased demand for AI components.
Upstart, an AI lender that utilizes artificial intelligence to evaluate individuals applying for personal loans, saw its shares drop by 53% in August, with most of the losses occurring after the company provided a disappointing outlook influenced by higher interest rates. Despite this decline, Upstart’s shares remain up by 143% for the year. Short interest in the company remains high, with over 30% of the float held by short sellers.
Analysts have noted that the recent surge in unprofitable tech firms and AI-focused companies tracked by Goldman Sachs has slowed down. Valuations have reached a point where investors need to be more selective, as rich valuations may limit near-term upside.
UBS suggests that investors maintain exposure to the tech sector but be mindful of balancing near-term optimism with other portfolio considerations.
In light of recent developments, it is clear that the excitement surrounding AI stocks can lead to a bubble in profitability. As companies try to establish a sustainable AI leadership position in a highly regulated industry, investors should expect significant fluctuations in stock prices.
In summary, the volatility in Upstart’s stock price is a stark reminder of the risks associated with investing in AI-driven companies. While AI has the potential to revolutionize various sectors, inflated valuations and the inability of some companies to meet investors’ high expectations have led to market retreat. As the tech sector continues to evolve, investors must exercise caution and carefully assess the long-term viability of AI-focused firms.
Amazon.com Inc., a separate entity, saw a 2.2% increase in stock price on Thursday, contributing to a monthly gain of 3.2%. This gain marks the sixth consecutive monthly increase for the e-commerce and cloud-computing giant, its longest such streak since July 2011. Over the past six months, Amazon’s stock has surged by more than 46%.
This article does not constitute financial advice.
