Truly great companies that transform an entire industry can provide years of phenomenal returns ... if you can find them. Lending is one of society's oldest industries, where staples like credit scores and credit cards have ruled the roost for years. The following two stocks have a lot to prove -- but they could offer years of market-beating upside if they succeed in changing how consumers borrow.

Person holding a credit card and their phone.

Image Source: Getty Images.

Smarter lending decisions

Upstart Holdings (UPST 4.66%) uses artificial intelligence to make credit lending decisions. The FICO credit score is the traditional measure of a consumer's creditworthiness, but Upstart claims its AI can reduce loan defaults by 75% while approving borrowers at the same rate. The company started with unsecured personal loans, but recently launched automotive lending, with business and small-dollar loans imminent, and mortgages still ahead on Upstart's future growth plans.

The company generates most of its revenue from fees generated when its lending partners originate an Upstart loan. Upstart had just 10 banking partners when the company IPO'd in late 2020 but had 57 as of the company's quarter ending March 31st, 2022. Furthermore, 11 of those now have no minimum FICO requirement for borrowers, a signal of confidence that Upstart's technology works as intended.

Investors recently punished Upstart for lowering its 2022 revenue guidance when it reported 2022 Q1 earnings, but the long-term outlook seems bright. More than 10,000 banks and credit unions operate in the United States. As long as lenders continue partnering with Upstart, it has ample room for expansion, especially as it enters new loan categories.

The stock now has a market cap of just $4 billion, and just under $1 billion of that is cash! Meanwhile, Upstart is still expecting 47% revenue growth in 2022, guiding for $1.25 billion. The company is also profitable, generating $158 million in net income over the past year. A recession could impact business results, so investors should expect some volatility. However, the long-term upside looks compelling if Upstart's business continues to thrive over the coming years.

Canceling credit cards

Affirm Holdings (AFRM 1.00%) is a Buy Now, Pay Later company that uses AI to make lending decisions, often at a consumer's point of sale. It's trying to displace credit cards by offering more consumer-friendly lending terms. For example, Affirm doesn't charge late fees and often offers 0% interest rates for certain purchases.

The company makes money at both the consumer and merchant levels; it charges consumers interest-bearing loans, and makes merchants pay fees such as commissions on transactions that Affirm touches. Consumers benefit from friendly and flexible payment options. Meanwhile, Affirm claims that its service increases sales for merchants and reduces the need for discounting. It's a win-win for both users and merchants, and Affirm makes money from both ends of the equation.

Affirm has focused heavily on getting its technology in front of as many users as possible, striking partnerships with e-commerce companies like Amazon, Shopify, Walmart, Target, and Wayfair. Collectively, these partners cover about 60% of the U.S. e-commerce landscape, plus thousands of smaller merchants and brands. Affirm has 207,000 merchants and 12.7 million users on its platform as of the quarter ending March 31, 2022.

Management estimates that the company's total addressable market will grow to $1.5 trillion in transaction volume by 2025. Affirm's $13 billion in volume over the past year indicates a ton of room for growth over the long term.

Like Upstart, the stock has fallen dramatically from highs, from $176 to as low as $14. At its current price of $25, the stock's market cap is just $7 billion. Meanwhile, Affirm is guiding for $1.3 billion in revenue for its fiscal 2022, a 49% jump from 2021. The company will need to show it can manage a recession where consumers spend less and potentially default more, but investors could see tremendous returns over the long term if things work out.