Out with the old and in with the new may be the mantra for fintech superstars Upstart Holdings (UPST 4.48%) and SoFi Technologies (SOFI -3.28%). Upstart is changing the way lenders assess individual credit risk, while SoFi is rapidly changing consumer banking.
Both of these companies are poised for years of strong growth, but one of the stocks is a much better buy right now.
The Upstart Holdings case
Upstart is changing the way banks and credit unions assess credit risk with artificial intelligence algorithms that draw on a deep well of personal information. The exact depth is a closely guarded secret, but the company insists its method paints a more complete picture of a person’s ability to repay a loan than Honest Isaaca three-digit FICO score.
Lenders flock to Upstart because it allows them to reach a wide range of potential borrowers who would normally slip through the cracks. During the first three years of 2022 In 2018, Upstart helped its partners provide more than 465,000 loans, which is 174% more than in the previous year.
The company is rapidly expanding from personal loans to auto loans, a market worth $751 billion annually. There’s no guarantee that Upstart will continue to earn a large share of the massive auto loan market, but it’s heading in that direction. The upstart’s stock is down more than 90% from last year’s peak, and its market value has fallen to $2.5 billion. That’s a very good price to pay for a company that can continue to grow rapidly.
The case of SoFi Technologies
Many consumer banks and credit unions hire Upstart to help them get new loans, but not SoFi. This challenger bank has its own AI-based algorithms to assess credit risk, and that’s not the only vertical integration that makes its stock a great buy. SoFi recently received a national bank charter, which means it can fund new loans from savings and checking account deposits from its rapidly expanding customer base. The company added 450,000 new members in the second quarter, bringing the total to 4.3 million.
It is difficult to overestimate the company’s ability to attract deposits. SoFi began refinancing student loans, and in 2020 at the end of June, it still had slightly more lending products than financial services products on its books. Just two years later, for every lending product, there were 4.5 financial services products, such as checking accounts and retirement accounts.
SoFi also owns Galileo, one of the most valuable technology platforms in the fintech industry. If your company wants to offer some kind of digital banking or payment card to customers, you’ll probably use the Galileo API to make that happen. At the end of June, SoFi had 117 million Galileo accounts on its books.
Relatively difficult times are ahead
Higher interest rates limit consumer demand for new loans. At the same time, fear of a recession limits lenders’ appetite for risk. This is bad news for both companies.
In July, Upstart shares fell after the company reported preliminary second-quarter results. Investors were shocked by the overall high for the period, which was significantly lower than expected. The company now says revenue will fall short of the previous $295 million to $305 million. USD calculation, and 228 mln.
Better to buy
While Upstart’s results fell short of expectations, SoFi recently released a second-quarter performance review that beat the company’s own expectations on the top and bottom lines. SoFi shareholders have a diversified source of company revenue to thank for strong results during a difficult period.
With uniquely integrated operations, SoFi can probably deliver more surprises. Therefore, it is better to buy shares now.
Cory Renauer holds a position at SoFi Technologies, Inc. and Upstart Holdings, Inc. The Motley Fool has a position and recommends Upstart Holdings, Inc. The Motley Fool has a disclosure policy.