Better Buy: SoFi Technologies vs Upstart Holdings

Better Buy: SoFi Technologies vs Upstart Holdings

The old outside and the new inside could be a mantra for fintech superstars Equity investments born (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 do banking.

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 of Upstart Holdings

Upstart is changing the way banks and credit unions assess credit risk with its AI-based algorithms that draw from a deep well of personal information. Exact depth is a closely guarded secret, but the company convincingly claims that its method creates a more complete picture of an individual’s ability to repay a loan than Handsome IsaacThe three-digit FICO score of FICO.

Lenders have flocked to Upstart because it allows them to reach a bunch of potential borrowers who normally escape the cracks. During the first three months of 2022, Upstart helped its partners make over 465,000 loans, a whopping 174% over the previous year period.

The company is rapidly expanding from personal loans to car loans, a market estimated at $ 751 billion annually. There is no guarantee that Upstart will continue to gain a large chunk of the huge auto loan market, but it is heading in that direction. Shares of Upstart have plummeted more than 90% from last year’s peak and its market cap has dropped to just $ 2.5 billion. This is a great 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 generate new loans, but not SoFi. This challenger bank has its own AI-based algorithms for assessing credit risk, and this isn’t the only vertical integration that makes its stock a great buy. SoFi recently got a national bank card, 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 to 4.3 million.

The company’s ability to attract deposits is difficult to overestimate. SoFi started by refinancing student loans, and at the end of June 2020 there were still a little more loan products in 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 each loan product.

SoFi also owns Galileo, one of the most valuable technology platforms in the fintech industry. If your business wants to offer customers some form of digital banking or payment card, you’ll likely end up using Galileo’s application programming interface to make it happen. At the end of June, there were 117 million Galileo accounts on SoFi’s books.

Relatively difficult times lie ahead

Higher interest rates are limiting 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 shocked by a total figure for the period that was significantly lower than expected. The company now says revenue will miss its previous estimate of $ 295 million to $ 305 million and instead come in at $ 228 million.

The best purchase

While Upstart’s results did not live up to projections, SoFi recently released a preview of its second quarter results that exceeded the company’s expectations in terms of profits and profits. SoFi shareholders have to thank the company’s diverse collection of revenue streams for the excellent results in a difficult time.

With uniquely integrated trades, SoFi can likely offer more upside surprises. This makes it the best stock to buy right now.

Cory Renauer has positions in SoFi Technologies, Inc. and Upstart Holdings, Inc. The Motley Fool has positions and recommends Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

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