In this piece, I evaluated two digital lending stocks, Upstart Holdings (NASDAQ:UPST) and Affirm Holdings (NASDAQ:AFRM), using TipRanks’ comparison tool to determine which is better.
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Upstart is an online lending platform that partners with financial institutions to provide loans to consumers by using non-traditional variables like employment and education to determine creditworthiness and utilizing artificial intelligence (AI) in its decision-making process. Affirm is a financial technology company that provides installment loans for consumers to finance large purchases at the point of sale.
Upstart is up 161% year-to-date, although it’s still down by 6% over the last 12 months. Meanwhile, Affirm has gained 67% year-to-date, although it’s off 26% over the last year.
Neither company is profitable, so we’ll look at the price-to-sales (P/S) ratio to gauge their valuations. For reference, the U.S. consumer finance industry is trading at a P/S of about 1.8 versus the three-year average of 2.2.
Upstart Holdings (NASDAQ:UPST)
Upstart is trading at a P/S of 4.4 (versus its average of 15.7 since March 2021), so it immediately looks chronically expensive versus its industry. The company has taken a hit from rising interest rates, but historically, its business model worked well and displayed tremendous growth during the most recent low-rate period. Thus, a neutral view seems appropriate because a better entry point is likely to appear before the Federal Reserve pivots and starts cutting rates.
At its initial public offering in December 2020, Upstart immediately captured the spotlight due to Wall Street’s interest in fintech companies. The company operates like a traditional lender but with a twist. It uses non-traditional metrics like employment history to determine creditworthiness rather than relying solely on a customer’s credit score.
Upstart enjoyed incredible revenue growth when interest rates were low, including a massive year-over-year jump of over 250% in 2021. The company was also close to profitability in 2018 and 2019 and then barely profitable in 2020 before posting a solid profit of $135.4 million in 2021, demonstrating the workability of its business model.
However, high interest rates took a massive toll on the company’s financials in 2022. Nonetheless, Upstart’s gross profit margin remains high at 72% over the last 12 months. In short, the company is in its early stage, so high interest rates are a problem. Over the long term, though, Upstart may have a bright future.
What is the Price Target for UPST Stock?
Upstart has a Moderate Sell consensus rating based on one Buy, three Holds, and eight Sell ratings assigned over the last three months. At $15.64, the average Upstart stock price target implies downside potential of 55.1%.
Affirm Holdings (NASDAQ:AFRM)
Affirm is trading at a P/S of 2.9 versus its average of 15.1 since February 2021. While the company’s valuation looks better than Upstart’s, a review of its financials reveals why it deserves a lower valuation. Thus, a bearish view looks appropriate because Affirm’s business model has yet to be proven.
Affirm’s business model hinges on consumers’ ability and desire to make big-ticket purchases and finance them at the point of sale. Like Upstart, Affirm has been struck by rising interest rates, but unlike Upstart, Affirm hasn’t yet demonstrated a working business model. While it has posted tremendous revenue growth rates, that growth decelerated to 55% in Fiscal 2022 (compared to 70.8% in Fiscal 2021).
Affirm’s gross margin has stood at about 49% to 50% in 2021 and 2022, but its net losses have been widening. In fact, the company’s net income margin has tumbled steadily, falling from -22% in 2020 to -64% over the last 12 months. Affirm also continues to issue large amounts of debt, including $7.6 billion over the last 12 months, which is a concern as interest rates rise.
In short, there are too many question marks with Affirm’s business model and long-term future right now.
What is the Price Target for AFRM Stock?
Affirm has a Hold consensus rating based on four Buys, six Holds, and two Sell ratings assigned over the last three months. At $15.32, the average Affirm stock price target implies downside potential of 1%.
Conclusion: Neutral on UPST, Bearish on AFRM
While this probably isn’t a particularly good time to invest in either company, given the macroeconomic environment and both stocks’ recent rallies, Upstart looks slightly better than Affirm over the long term. Upstart’s business model has been proven in low-rate environments, but Affirm has much more to prove.
It’s likely that a better entry point will materialize for Upstart, although Affirm looks like more of a gamble over the long term.
