Visa (V -0.65%) is a dependable stock that has outperformed the market over time, and there are reasons to believe it can continue to do so. Upstart Holdings (UPST -1.99%) is a hot new stock that skyrocketed last year and has come down from its highs. Which one is the better buy? Let's compare how they're doing now, their potential, and their valuations.
How are they doing?
Visa is the largest credit card processing network in the world. It handled more than 200 billion transactions over the past 12 months with a value of more than $13 trillion, servicing 3.8 billion cards worldwide.
Its basic business model is fairly simple. It processes transactions between customers, merchants, and banks, and takes a small cut of each transaction. Those fees are minimal per transaction, usually around 2%, but they add up: 2021 revenue was $24.1 billion. It's also a high-margin business, with net income typically coming in at more than half of revenue -- $12.9 billion in 2021.
Beyond processing, Visa has also built out business development services, including many fintech applications, such as contactless payments. It has partnerships with many financial services companies and routinely acquires small businesses whose services match its goals. For example, it recently acquired Swedish fintech Tink, an open-banking platform.
Upstart is a credit evaluation platform that uses artificial intelligence to assess credit risk more accurately than traditional models. It takes many more factors into account and runs each borrower's data through thousands of data points, resulting in more borrowers getting approvals without increasing the risk to the lender. That's been a winning recipe, and Upstart has posted phenomenal growth since it went public at the end of 2020. Revenue increased 264% year over year in 2021 to $849 million, and net income rose from $6 million in 2020 to $135 million in 2021. Upstart has 42 banking partners on its platform as of February.
What's their potential?
Visa's business highly correlates with the state of the general economy. When people spend a lot, Visa makes more money. When shoppers cut back, Visa makes less. That makes for a fairly predictable business cycle, and it means that even though sales decline when times are rough, they grow in times of plenty. Since in general there are more times of plenty than not, Visa is a surefire bet for growth over time. That's what has played out so far historically, and its stock has followed suit, outperforming the S&P 500.
Visa's future potential is tied into its ability to stay on target with consumer demand and financial trends. It has done an excellent job of that so far as financial technology has changed how payments are made, and if it can continue to do so, the future looks bright.
Upstart has a very different trajectory. It's just starting out, which accounts for its triple-digit sales growth. It recently began car lending, which it estimates as a $727 billion market, and it's planning to enter mortgages, its biggest addressable market at $4.6 trillion. Its potential is massive, and it's already profitable.
What about valuation?
Visa stock trades at 35 times trailing-12-month earnings, which isn't cheap for an established, slow-growing company. It speaks to investor confidence in the company's future, which is worth somewhat of a premium. Its stock is down a little more than 1% in 2022, even though many fintech companies have experienced stock decreases related to general macroeconomic trends.
That would include Upstart, whose stock is down 46% this year. Shares at this price trade at 58 times trailing-12-month earnings, which is cheap as compared to its more recent valuations, and considering that it's posting triple-digit sales growth. That makes its shares worth a higher premium, and its stock price has decreased enough at this point that it's looking like a good deal.
Which one is the better buy?
I recommend both Visa and Upstart as additions to a balanced portfolio, and the better buy mostly boils down to what kind of stock you're looking to acquire right now. Visa adds stability and almost-guaranteed gains over time; it's the kind of stock to have in your portfolio as a ballast.
Upstart offers the potential for higher gains, but with more volatility. Consider that Upstart stock gained more than 650% from Jan. 1, 2021 to its high on Oct. 10, and has declined 80% since then.
With its huge addressable market and profitable growth, Upstart stock is likely to see high gains over the long term. And at the current price, it doesn't look that risky, making Upstart the better buy for higher long-term gains.