Debating Fintech Stocks: Upstart's Superiority over SoFi
Fintech stocks like Upstart Holdings and SoFi Technologies have experienced rollercoaster rides, particularly in the wake of fluctuating interest rates. These companies went public between 2020 and 2021, riding the wave of zero-percent interest rates aiming to boost the U.S. economy during the pandemic. However, once the Federal Reserve raised rates to combat post-pandemic inflation, a stock market bubble burst, leaving both stocks well below their former highs.
Navigating the volatile economy is no easy task for these early-stage growing companies. So, which fintech stock offers the best investment opportunities moving forward?
Let's explore these two contenders:
SoFi Technologies
As a digital bank, SoFi's primary function is being a financial service provider. It leverages a fintech unit called Galileo, which offers technology services for 160 million users across varying financial apps and products. SoFi's banking business has grown significantly, with its customer count rising from over a million in the early stages of 2020 to 9.3 million by the third quarter of 2024.
SoFi's explosive user growth has contributed to its growth in both revenue and profitability. Despite facing challenges due to a federal student loan repayment pause from 2020 to 2023, SoFi managed to become profitable based on generally accepted accounting principles (GAAP) in 2024.
Upstart Holdings
Upstart utilizes AI algorithms to evaluate borrowers' creditworthiness for consumer loans. The company prefers to originate loans and then refer them to partner banks or institutional investors. Upstart proved its profitability by generating a significant GAAP profit in 2021.
However, rate hikes between 2022 and 2023 hit Upstart hard. Loan demand waned, and the company found itself stuck holding loans on its balance sheet after buyers dried up. Consequently, Upstart began losing money, and despite improved loan volumes since the Federal Reserve halted rate hikes, growth has yet to fully recover.
Today's Economy and the Fintech Winner
Following its zero-percent policy, the Federal Reserve's aggressive rate hikes between 2022 and 2023 created one of the steepest cycles in history. In today's economic climate, both companies must consider how they can thrive.
SoFi and Upstart rely on consumer lending at their core. Banks like SoFi earn net interest income from the difference between deposit rates and loan interest. Higher rates expand the income spread, but high interest rates can lead to fewer borrowers. However, an end to the federal loan repayment pause and a pickup in financing activity could benefit SoFi's student loan business.
Upstart's business has regained momentum by securing funding partners for its loans and moving loans off its balance sheet.
Which Fintech Stock is the Winner?
SoFi claws its way to the top due to its user growth and ability to turn a profit during headwinds. The company's growth catalysts include:
- A 35% user growth rate in the third quarter of 2024.
- Cross-selling of services within its app.
- The potential upside from student loan borrowing and refinancing.
Meanwhile, analysts predict SoFi's earnings will grow by an average of 50% annually over the next three to five years. Considering the stock trades at a forward price-to-earnings ratio (P/E) of 56, its impressive growth potential makes a compelling case for buying the stock today.
Enrichment Data:
Both SoFi Technologies and Upstart Holdings have shown impressive growth potential in the fintech sphere, with their performance and strategies varying based on their performance during changing interest rates.
SoFi Technologies
- Performance: SoFi's stock surged 55% in 2024 due to Federal Reserve rate cuts and optimism about avoiding a recession.
- Business Strategy: SoFi has a diversified loan offerings portfolio, including personal, student, and home loans, providing significant revenue opportunities.
- Financial Stability: SoFi boasts strong capital ratios and declining loan delinquencies, making it an attractive choice for investors.
- Forecast: Analysts predict SoFi's stock price to be around $9.33 in 2025, with a consensus one-year price target of $14.35. However, recent Q4 earnings tempered forward guidance, causing volatility in the stock price.
Upstart Holdings
- Performance: Upstart's shares surged 100.4% over the past year, outperforming the industry and the Financial Select Sector SPDR Fund XLF ETF.
- Business Strategy: Upstart leverages AI to assess borrower creditworthiness, resulting in faster loan approvals and becoming an attractive alternative to traditional lenders.
- Valuation: Upstart trades at a premium — a forward 12-month price-to-sales (P/S) of 7.51X, outpacing competitors.
- Growth Potential: Upstart's AI-driven approach and potential for expansion make it an attractive long-term investment despite the high valuation.
In summary, SoFi Technologies boasts more stability and growth potential in today's economy due to its diversified loan offerings and strong financial stability indicators. However, Upstart Holdings' AI-driven approach and growth potential make it an appealing option for the future, resulting in a close race between the two.
Investors interested in finance and money might consider the performance of SoFi Technologies and Upstart Holdings, two fintech companies mentioned in the text. SoFi's stock surged in 2024 due to the Federal Reserve's interest rate cuts, while Upstart's shares experienced a significant growth of 100.4% over the past year.
Given the current economy and the challenges faced by both companies due to changing interest rates, analysts predict that SoFi's earnings will grow at an average of 50% annually over the next three to five years, making it an appealing investment opportunity with a forward price-to-earnings ratio of 56.
