Out with the old and in with the new could be a mantra for fintech superstars Upstart Holdings (NASDAQ: UPST) and SoFi Technologies (NASDAQ: SOFI). Upstart is upending the way lenders assess individual credit risk, while SoFi is rapidly changing how consumers bank.
Both of these companies are poised for years of rapid growth, but one of the stocks is a much-better buy right now.
The case for Upstart Holdings
Upstart is changing how banks and credit unions evaluate credit risk with its artificial intelligence-powered algorithms that draw from a deep well of personal information. The exact depth is a closely guarded secret, but the company makes a convincing case that its method creates a more comprehensive picture of an individual’s ability to repay a loan than Fair Isaac‘s three-digit FICO score.
Lenders have been flocking to Upstart because it allows them to reach heaps of potential borrowers who normally slip through the cracks. During the first three months of 2022, Upstart helped its partners originate over 465,000 loans, a whopping 174% more than the previous year’s period.
The company is rapidly expanding from personal loans to auto loan origination, a market estimated at $751 billion annually. There are no guarantees that Upstart will continue earning a large share of the enormous auto loan market, but it’s heading in that direction. Shares of Upstart have tumbled more than 90% from their peak last year, and its market cap is down to just $2.5 billion. That is a very nice price to pay for a company that could keep growing by leaps and bounds.
The case for 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-fueled algorithms for assessing credit risk, and that isn’t the only vertical integration that makes its stock a great buy. SoFi recently obtained a national bank charter, which means it can fund new loans with savings and checking account deposits from its rapidly expanding customer base. In the second quarter, the company added 450,000 new members, bringing the total up to 4.3 million.
The company’s ability to attract deposits is hard to overstate. SoFi got started by refinancing student loans, and at the end of June 2020, there were still slightly more lending products on its books than financial services products. Just two years later, there were 4.5 financial service products such as checking accounts and retirement accounts for every lending product.
SoFi also owns Galileo, one of the fintech industry’s most valuable technology platforms. If your business wants to offer customers some form of digital banking or a payment card, you’ll probably end up using Galileo’s application programming interface to make it happen. There were 117 million Galileo accounts on SoFi’s books at the end of June.
Relatively tough times ahead
Higher interest rates are limiting consumer demand for new loans. At the same time, fears of a recession are limiting lenders’ appetites for risk. This is bad news for both companies.
In July, Upstart stock got hammered after the company announced preliminary results from the second quarter. Investors were rattled by a total top-line figure for the period that was dramatically lower than expected. The company now says revenue will miss its previous estimate of $295 million to $305 million and land instead at $228 million.
The better buy
While Upstart’s results fell short of projections, SoFi recently issued a preview of second-quarter results that exceeded the company’s own expectations on the top and bottom lines. SoFi shareholders have the company’s diverse collection of revenue streams to thank for strong results during a challenging period.
With uniquely integrated operations, SoFi can probably deliver more surprises to the upside. That makes it the better stock to buy right now.
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