Better Buy: SoFi Technologies vs. Upstart Holdings

Out with the old and in with the new may be the mantra for fintech superstars Upstart Holdings (UPST 4.48%) and SoFi technologies (SOPHIE -3.28%). Upstart is revolutionizing 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 AI-based algorithms that draw from a deep well of personal information. The exact depth is a closely guarded secret, but the company makes a strong case that its method creates a more comprehensive 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 tons of potential borrowers who would normally slip through the cracks. In the first three months of 2022, Upstart helped its partners open more than 465,000 loans, which is a whopping 174% more than the year-ago period.

The company is rapidly expanding from personal loans to auto lending, a market valued at $751 billion a year. There are no guarantees that Upstart will continue to gain a large share of the huge auto loan market, but it is headed in that direction. Upstart’s stock has tumbled more than 90% from its peak last year, and its market capitalization has shrunk to just $2.5 billion. That’s a very good price for a company that can continue to grow 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-powered 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 banking charter, meaning it can finance new loans with savings and checking account deposits from its rapidly growing customer base. In the second quarter, the company added 450,000 new members, bringing its total to 4.3 million.

The ability of the company to attract deposits is difficult to overestimate. SoFi began by 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, there were 4.5 financial services products such as checking accounts and retirement accounts for every credit 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 probably end up using the Galileo API to make it happen. There were 117 million Galileo accounts on SoFi’s books at the end of June.

Relatively difficult times ahead

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

In July, Upstart shares tumbled after the company announced preliminary second-quarter results. Investors were rattled by total profit 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 instead come in at $228 million.

The better you buy

Although Upstart’s results fell short of estimates, SoFi recently released a preview of second-quarter results that exceeded the company’s own expectations on the top and bottom lines. SoFi shareholders can thank the company’s diverse collection of revenue streams for strong results during a difficult period.

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

Corey Renauer holds 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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