Shares of Upstart (UPST -1.71%) dropped 21.9% in December, according to data provided by S&P Global Market Intelligence. And as of this writing, it's down another 7% year to date in 2025. Interestingly enough, the drop seems to be correlated with changes to the federal funds rate on Dec. 18.
For those unaware, Upstart's business is sensitive to changes in interest rates. Its platform seeks to increase approvals for borrowers while simultaneously lowering risk to lenders. But its revenue has been cut in half in recent years because lenders weren't as willing to fund Upstart's loans -- there were high-rate opportunities elsewhere.
However, Upstart is now back to growth. Through the first three quarters of 2024, its total revenue was up 12% from the comparable period of 2023. The federal funds rate was also down 16% from its peak in 2024, thawing the icy stance from Upstart's lending partners. This is why Upstart stock soared 51% in 2024.
In short, Upstart's business is improving with lower rates. But the stock counterintuitively dropped in December as rates came down a little more. So there's clearly more to this story.
Why investors might have been selling Upstart stock
In the investing world, expectations about the news tend to precede the news itself. And that's certainly true of interest rates. While lower interest rates can help Upstart's business, the investing community already expected a 0.25% cut in December, and that's what they got. But commentary from the Federal Reserve made investors question whether more rate cuts were on the table in 2025.
In short, Upstart stock may have dropped in the back half of December because investors believe that the interest rate benefit is already old news. And in that case, some investors may have sold to lock in big year-to-date gains.
Moreover, Upstart co-founder and CEO David Girouard sold nearly 42,000 shares of Upstart stock on Dec. 16, and it was disclosed on Dec. 18. Granted, the sale was related to recently exercised stock options and was a pre-planned trade. And he still owns millions of shares, so Girouard's actions aren't necessarily anything to be concerned about.
Still, investors sometimes get antsy when insiders sell. And Upstart investors might have been looking for a reason to sell, considering there may not be further interest rate improvements in 2025.
What should investors do now?
Upstart's business model is undeniably sensitive to interest rate changes, especially pronounced changes. That said, not even the Federal Reserve itself can accurately predict rates, much less everyday investors. That's why it's better to focus on the business itself and hope economic conditions eventually provide a tailwind.
On the business side, Upstart continues to partner up with new financial institutions, which is important. And consumer demand shouldn't be an issue, considering its auto loan and HELOC products are starting to scale. The stock is expensive at nearly 10 times sales, but there is still some tangible progress to be encouraged about.
