Artificial intelligence-based lending platform Upstart's (UPST 13.24%) stock attracted a lot of market attention last year, with its stock price catapulting nearly 700% by the end of October. The stock got caught up in the broader tech stock sell-off late in the year and it ended the year with a 270% gain.
The market in general is seeing a shift from hot tech stocks to more traditional value stocks, such as Visa (V 0.49%). The financial services giant made a big comeback last year after suffering through pandemic-related headwinds, and its stock end the year flat.
Events so far in 2022 are pointing to a bit of a performance reversal for these two companies. Visa stock is already up about 7.5% in 2022 while Upstart stock is down a depressing 27.3%. Visa announced last week that it's partnering with an Upstart competitor, Tel Aviv-based Pagaya. What does this deal do for Visa, and what could it mean for Upstart?
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Greater access equals more revenue
A big part of Visa' stock price gains in 2022 can be attributed to the release of excellent fiscal 2022 first-quarter earnings last week (For the period ended Dec. 31). Net revenue increased 24% year over year to more than $7 billion, and net income increased 27% to $4 billion. Visa is the biggest credit card processing company in the world, but it does a lot more than process credit card transactions.
Visa also works with its merchant partners and provides many fintech solutions to help them grow their businesses. These include card chips for contactless payments and "buy now, pay later" installment payment plans such as those offered by companies like Affirm Holdings. Visa often works together with smaller fintech companies, whether by acquiring them or partnering together, to offer many of its services.
Last week, it announced a partnership with Pagaya. Pagaya is an artificial intelligence-based credit assessment company that seeks to better identify a consumer's credit risk, enabling greater loan approvals without more risk to the lender. It's a service that's very similar to Upstart. Whereas Upstart is focused on personal and auto loans, Pagaya has entered a wider terrain, including credit cards, insurance, and mortgages. The other major difference between the two companies is that after Pagaya works with lenders to expand access, it sells approved loans to large institutional investors.
The Visa partnership is great news for Pagaya, as it expands Pagaya's existing network. The wider customer base should add a tremendous amount of data into Pagaya's analysis algorithms, making for an even better product. It should also provide a boost for Visa. Visa management said, "Through our partnership with Pagaya, we're providing our issuing bank clients and co-brand partners with next-generation technology to expand their customer base, boost conversion rates, increase purchasing power, and thus grow their revenue."
Pagaya has engaged in a special-purpose acquisition company (SPAC) partnership with EJF Acquisition, which is set to take Pagaya public in early 2022.
Where does this leave Upstart?
Investors have been excited about Upstart's proprietary technology and the opportunities it brings, but clearly Upstart is not the only game in town. Pagaya is smaller than Upstart, with $137 million in third-quarter revenue vs. Upstart's $228 million. With an estimated more than $5 trillion in its addressable market (TAM), Upstart has plenty of room to expand. So this news shouldn't affect Upstart or its investors all that much. If anything, it highlights potential additional uses for Upstart's services. Pagaya estimates its addressable market from credit cards at $183 billion, and Upstart doesn't include this market in its TAM estimates.
The data does suggest that Pagaya is ahead of Upstart in the credit card space, which could give it an edge in the long run.
Both Upstart and Pagaya appear to be great companies with huge prospects. Upstart stock has bombed so far this year, but it's now trading at 96 times trailing 12-month earnings, a huge discount as compared with 2021. The stock price is still not cheap, but the growth potential is enormous. At the same time, I would keep an eye on when Pagaya hits the markets, as it could turn out to be an excellent investment. And as always, Visa is one of the best value stocks around, and if you don't own it yet, consider adding it to your portfolio.
