Better Buy: SoFi Technologies vs. Upstart Holdings

aUsing the old and the new could be a catchphrase for fintech stars upstart holding (NASDAQ: UPST) And the SoFi Technologies (NASDAQ: SOFI). Upstart is changing the way lenders assess individual credit risk, while SoFi is changing the way consumers approach banks.
Both companies are preparing for years of rapid growth, but one stock is a much better buy right now.

Upstart holding case

Upstart is changing how banks and credit unions assess credit risk with its AI-powered algorithms that draw from a deep well of personal information. The exact depth is a closely guarded secret, but the company makes a compelling case that its method creates a more comprehensive picture of an individual’s ability to repay the loan than Adel IsaacThree-digit FICO result.
Lenders have been flocking to the upstart as it allows them to access piles of potential borrowers who usually slip through the gaps. During the first three months of 2022, Upstart helped its partners generate more than 465,000 loans, a 174% increase over the previous year period.

The company is rapidly expanding from personal loans to creating auto loans, with the market estimated at $751 billion annually. There are no guarantees that Upstart will continue to gain a significant share of the massive auto loan market, but it is heading in that direction. Upstart shares are down more than 90% from their peak last year, and their market capitalization has fallen to just $2.5 billion. This is a very good price to pay for a company that can continue to grow by leaps and bounds.

Case SoFi Technologies

Many consumer banks and credit unions are hiring Upstart to help create new loans, but not SoFi. This rival bank has its own AI-powered algorithms to assess credit risk, and it’s not the only vertical integration that makes its stock a great buy. SoFi recently acquired a national banking charter, which means it can fund new loans through savings accounts and checking 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.
It is difficult to overstate the company’s ability to attract deposits. SoFi began refinancing student loans, and at the end of June 2020, there were slightly more lending 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 per lending 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 will likely end up using the Galileo API to make that happen. There were 117 million Galileo accounts in the SoFi books at the end of June.

Relatively difficult times ahead

High interest rates limit consumer demand for new loans. At the same time, fears of a recession are curbing lenders’ appetite for risk. This is bad news for both companies.
In July, Upstart’s stock took a hit after the company reported preliminary results for the second quarter. Investors were shaken by the higher line total number for the period, which was significantly lower than expected. The company now says revenue will miss its previous estimate of $295 million to $305 million and will reach $228 million instead.

Best Buy

While Upstart’s results fell short of expectations, SoFi recently released a preview of second-quarter results that beat the company’s own expectations at the top and bottom. SoFi shareholders have a variety of revenue streams for the company to thank for strong results during a difficult period.
With its uniquely integrated operations, SoFi is likely to offer more surprises to the upside. This makes it the best stock to buy right now.
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Cori Renauer holds positions at SoFi Technologies, Inc. and Upstart Holdings, Inc. Motley Fool has positions at Upstart Holdings, Inc. The Motley Fool Company recommends a disclosure policy.

The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

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