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Upstart vs. SoFi: Which Stock Is Worth Investors’ Money?
Stock Analysis & Ideas

Upstart vs. SoFi: Which Stock Is Worth Investors’ Money?

The money lending business in the United States has been transformed as access to affordable credit is becoming easier. As legacy credit systems from banks fail to properly identify and quantify risk when it comes to giving loans, one-stop apps or financial platforms are entering the market to help people avail credit. People are increasingly opting for student loans, home loans, auto loans, insurance, and availing of different financial services through these platforms.

According to a Research and Markets report, the total transaction value in the personal finance sector is expected to grow at a compounded annual growth rate (CAGR) of 23.1% between 2019 and 2024.

Let us compare two such fintech companies, Upstart Holdings and SoFi Technologies, using the TipRanks stock comparison tool, and examine what Wall Street analysts are saying about these stocks.

Upstart Holdings (NASDAQ: UPST)

Shares of Upstart soared 35.6% on Wednesday to close at $148.01, after the artificial intelligence (AI)-based lending platform had an exceptional 2021. The company registered triple-digit revenue growth of 252% year-over-year to post revenues of $305 million in Q4.

This strong revenue growth was driven by Upstart’s fee revenues of $287 million, again showing exceptional growth of 240% year-over-year.

It is important here to look at how UPST earns its revenues. The company charges referral fees to banks for every loan referred through the Upstart.com website and originated by a bank partner. UPST also charges a platform fee for every loan origination, regardless of its source, and servicing fees for loans as consumers repay them.

Co-Founder and CEO of Upstart Holdings, Dave Girouard, commented on the results, “I’m also happy to report that, with help from an epic push by our team in the last few weeks of the year, auto loan originations on our platform are now ramping quickly and will provide growth opportunities to Upstart for years to come.”

The company’s management also pointed out on its earnings call that with the surge in Q4 revenues, UPST was on its way to earning “more than $1 billion in revenue on an annualized basis.”

Moreover, Q4 adjusted earnings came in at $0.89 per share, significantly higher than analyst estimates of $0.51 per share.

What’s more, the company anticipates revenues of $1.4 billion in FY22, a growth rate of 65% year-over-year. This outlook is even higher than Wedbush analyst David J. Chiaverini’s projection of revenues of $1.36 billion and a consensus growth rate of 50%.

This bullish outlook aside, the one thing that concerned Chiaverini was that UPST’s delinquencies were going up. The company’s management stated on its earnings call that “with each successive vintage that’s originated on our platforms, the absolute level of delinquency default goes up, and that’s reflected in our securitizations.”

Here, vintage refers to the month or quarter in which the loan was granted.

Chiaverini pointed out that the rising delinquencies have affected UPST’s loan securitization issuance, which has gone down to $100 million in the first quarter-to-date from $800 million in the fourth quarter, citing data from Finsight.

Securitization is the process of converting a batch of loans into marketable securities. It is important to note here that rising delinquency rates can impact the cash flows from securitization.

Moreover, Chiaverini cited Finsight data to point out that 27% of UPST’s loan origination was funded by securitizations last year, “which is not an immaterial level, in our view.”

Interestingly, while Upstart’s management noted on its fiscal Q4 earnings call that rising delinquency rates was “not a bad thing”, analyst Chiaverini remained concerned “about the company’s funding profile if the deteriorating trajectory of its delinquency rates don’t normalize in coming months.”

Another concern for the analyst was that Upstart’s loan underwriting model has not yet operated through a true recession, which means it has yet to be “battle-tested.”

As a result, the analyst remained sidelined on the stock with a Hold rating with a price target of $110 (25.7% downside).

However, other analysts on the Street, are cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 6 Buys and 3 Holds. The average Upstart Holdings stock prediction of $213.33 implies upside potential of approximately 44.1% to current levels for this stock.

SoFi Technologies (NASDAQ: SOFI)

SoFi offers a suite of financial products through its platform, a one-stop-shop app, and its key business segments include Lending and Financial Services. In the past month, the stock has gone up 8.5%, following the news of its regulatory approval from the Office of the Comptroller of the Currency (OCC) and the Federal Reserve to become a Bank Holding Company.

The company will become a national bank through its acquisition of Golden Pacific Bancorp, and operate its bank subsidiary as SoFi Bank, National Association. The company closed its acquisition of Golden Pacific Bancorp earlier this month.

CEO of SoFi, Anthony Noto stated that the bank charter would enable the company to, “Lend at even more competitive interest rates and provide our members with high-yielding interest in checking and savings,” and add to its portfolio of financial products and services.

SoFi is expected to announce its Q4 results on March 1. Considering the regulatory approval for SoFi to become a bank was considered by many analysts as an important catalyst, let us look at what analysts are saying post-the approval.

Rosenblatt Securities analyst Sean Horgan viewed this news, “As the primary driver of SOFI’s expected outperformance over the next 12 months.” As a result, the analyst revised his adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) estimate for 2022 from $48 million to $235 million with potential upside.

Horgan’s adjusted EBITDA estimate assumes “the full run-rate benefits of the bank charter begin mid-year and SOFI realizes ~50% of the initially anticipated impact to EBITDA.”

The analyst has a Buy rating and a price target of $25 on the stock.

However, Credit Suisse analyst Timothy Chiodo remained sidelined on the stock with a Hold rating as the analyst remained concerned about SoFi’s gain on sale (GoS) margin. Chiodo is of the view that SoFi’s GoS margin is likely to decrease in Q4 due to its peers showing compressed GoS margins owing to rising competition as the spread between primary and secondary mortgage markets is declining.

GoS margin refers to the difference between loan origination costs for the bank or lender and the cost at which the lender sells the loan.

The analyst has a price target of $16.50 (26.2% upside) on the stock.

Rest of the analysts on the Street are cautiously optimistic about the stock with a Moderate Buy consensus rating based on 8 Buys and 3 Holds. The average SoFi stock prediction of $18.86 implies upside potential of approximately 44.2% to current levels for this stock.

Bottom Line

Analysts are cautiously optimistic about both stocks and based on the upside potential over the next 12 months, both stocks seem to be a Buy.

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