Buy better: SoFi Technologies vs. Upstart Holdings

Buy better: SoFi Technologies vs. Upstart Holdings

Out with the old and in with the new could be a mantra for fintech superstars Ordinary 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 the way consumers bank.

Both 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 the way banks and credit unions assess credit risk with its artificial intelligence-based algorithms that draw from a deep well of personal information. The exact depth is a closely guarded secret, but the company makes a compelling claim that its method produces a more comprehensive picture of an individual’s ability to repay a loan than The beautiful Isaac‘s three-digit FICO score.

Lenders flock to Upstart because it allows them to reach a crowd of potential borrowers who typically slip through the cracks. In the first three months of 2022, Upstart helped its partners originate over 465,000 loans, a whopping 174% more than in the same period last year.

The company is rapidly expanding from personal lending to auto lending, a market valued at $751 billion annually. There’s no guarantee that Upstart will continue to take a large share of the massive auto loan market, but it’s moving in that direction. Upstart’s shares are down more than 90% from their peak last year, and its market cap has fallen to just $2.5 billion. That’s a very good price for a company that could continue to grow by leaps and bounds.

The case for SoFi Technologies

Many consumer banks and credit unions are hiring Upstart to help originate new loans, but not SoFi. This challenger bank has its own AI-powered algorithms for assessing credit risk, and that’s not the only vertical integration that makes its stock a great buy. SoFi recently received a national banking license, meaning it can fund new loans with savings and checking accounts from its rapidly 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 can hardly be overstated. SoFi started out refinancing student loans and at the end of June 2020 still had slightly more loan products on its books than financial services products. Just two years later, for every loan product, there were 4.5 financial services products, such as checking accounts and retirement accounts.

SoFi also owns Galileo, one of the fintech industry’s most valuable technology platforms. If your company wants to offer customers some form of digital banking or a payment card, you will probably use 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 hard times are ahead

Higher interest rates limit consumer demand for new credit. At the same time, recession fears are limiting lenders’ risk appetite. This is bad news for both companies.

In July, Upstart stock came under pressure after the company announced preliminary second-quarter results. Investors were unsettled by a total sales figure for the period that came in dramatically lower than expected. The company now says sales will miss its previous estimate of $295 million to $305 million, landing at $228 million instead.

The better buy

While Upstart’s results fell short of guidance, SoFi recently released a preview of second-quarter results that beat the company’s own expectations for revenue and earnings. SoFi shareholders credit the company’s diverse revenue streams for strong results during a challenging time.

With uniquely integrated operations, SoFi can likely deliver even more upside surprises. That makes it the better stock to buy right now.

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

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