Better buy: SoFi Technologies versus Upstart Holdings
Leaving the old and entering the new could be a mantra for fintech superstars Assets received (UPST 4.48%) and Sofi Technologies (SOFI -3.28%). Upstart is disrupting the way lenders assess individual credit risk, while SoFi is rapidly changing the way consumers bank.
Both of these companies are poised for years of rapid growth, but one stock is a much better buy right now.
The case of Upstart Holdings
Upstart is changing the way banks and credit unions assess credit risk with its artificial intelligence-based algorithms that tap into a deep well of personal information. The exact depth is a closely guarded secret, but the company convincingly demonstrates that its method creates a more complete picture of an individual’s ability to repay a loan than Just Isaacthe three-digit FICO score of .
Lenders have flocked to Upstart because it allows them to reach loads of potential borrowers who normally fall through the cracks. In the first three months of 2022, Upstart helped its partners take out over 465,000 loans, 174% more than the prior year period.
The company is rapidly expanding from personal loans to creating auto loans, a market estimated at $751 billion a year. There’s no guarantee Upstart will continue to gain a sizable share of the huge auto loan market, but it’s headed in that direction. Upstart’s shares have fallen more than 90% from their peak a year ago, and its market capitalization has fallen to just $2.5 billion. It’s a very good price to pay for a company that could continue to grow by leaps and bounds.
The case of SoFi Technologies
Many consumer banks and credit unions hire Upstart to help originate new loans, but not SoFi. This challenger bank has its own AI-powered algorithms for assessing credit risk, and it’s not vertical integration alone that makes its stock a great buy. SoFi recently obtained a national banking charter, which means it can fund new loans with deposits in savings and checking accounts from its growing customer base. In the second quarter, the company added 450,000 new members, bringing the total to 4.3 million.
The company’s ability to attract deposits is difficult to overestimate. SoFi began by refinancing student loans, and as of late June 2020, there were still slightly more loan products on its books than financial services products. Just two years later, there were 4.5 financial services products such as checking accounts and retirement accounts for every loan product.
SoFi also owns Galileo, one of the fintech industry’s most valuable technology platforms. If your company wants to offer its customers some form of digital banking or payment card, you’ll probably end up using Galileo’s application programming interface to achieve this. There were 117 million Galileo accounts on SoFi’s books at the end of June.
Relatively difficult times ahead
Higher interest rates limit consumer demand for new loans. At the same time, fears of a recession are limiting lenders’ risk appetite. This is bad news for both companies.
In July, Upstart shares were hammered after the company announced preliminary second quarter results. Investors were shaken by total revenue for the period that was significantly below expectations. The company now says revenue will miss its previous estimate of $295-305 million and instead land at $228 million.
While Upstart’s results fell short of projections, SoFi recently released a preview of second-quarter results that beat the company’s own expectations for revenue and profit. SoFi shareholders have the company’s diverse collection of revenue streams to thank for its strong results during a difficult time.
With uniquely integrated operations, SoFi can likely deliver more upside surprises. This makes it the best stock to buy right now.
Cory Renauer holds positions at SoFi Technologies, Inc. and Upstart Holdings, Inc. The Motley Fool holds positions and recommends Upstart Holdings, Inc. The Motley Fool has a Disclosure Policy.