PayPal (PYPL -1.80%) and Upstart (UPST -0.81%) represent two very different ways to invest in the fintech market. PayPal processes digital payments for businesses and individuals, while Upstart helps lenders approve loans with non-traditional data like a customer's educational history, area of study, GPA, standardized test scores, and work history.

Both stocks attracted a lot of bulls during the pandemic-induced rally in growth stocks last year but fizzled out as rising interest rates and other macro headwinds crushed the market. PayPal's stock hit an all-time high of $308.53 last July, but now trades at about $80. Upstart closed at an all-time high of $390 last October, but it trades at $23 today. Could either of these beaten-down fintech plays bounce back? Let's take a fresh look at their businesses to find out.

A person uses a phone to make a purchase at a street market.

Image source: Getty Images.

How PayPal lost its way

PayPal's problems started in 2018, when eBay (EBAY -1.53%), its former parent company and major retail partner, started shifting its orders to the smaller Dutch backend software provider Adyen (ADYE.Y -3.52%) in a three-year transition.

PayPal's revenue rose 19% in 2019 but accelerated to 21% growth in 2020 as the pandemic boosted online sales and temporarily offset its gradual loss of eBay's business. Encouraged by that acceleration, PayPal proclaimed it could nearly double from its active accounts from 377 million in 2020 to 750 million in 2025 during its investor day last February.

However, PayPal's revenue rose only 18% in 2021, and it expects just 10% growth this year. That slowdown prompted it to abandon its target of reaching 750 million active accounts this February. Instead, it admitted that its loss of eBay to Adyen had clipped its top line growth, and it was struggling to fill that void with new customers in a post-pandemic world.

PayPal's adjusted operating margin declined in 2021 and the first half of 2022 as it ramped up its spending on new features, grappled with tough currency headwinds, and faced unfavorable year-over-year comparisons to its release of credit reserves in 2021. That's why it expects its adjusted earnings per share (EPS) to decline 14% to 16% for the full year.

PayPal's slowdown was disappointing, but it's still growing and its stock finally looks cheap at 17 times forward earnings. But the departure of its longtime CFO, John Rainey, this May, its aggressive expansion into the risky BNPL (buy now, pay later) market, and its controversial proposal to fine individual accounts $2,500 per infraction for spreading "misinformation" (which it hastily walked back) all raise bright red flags for its future.

Why Upstart fell off a cliff

Upstart is trying to disrupt legacy credit scoring companies like FICO (FICO -2.08%), which helps lenders approve loans by assessing an applicant's income level, credit history, and other traditional data. Upstart's non-traditional approach can help those lenders approve additional loans for customers with limited employment and credit histories.

Upstart's revenue rose 42% in 2020, driven by its 40% growth in bank-originated loans, and then skyrocketed 264% in 2021 as its bank-originated loans increased 338% to 1.3 million. Its revenue rose another 70% year over year in the first half of 2022, but analysts expect just 6% growth for the full year as its revenue declines sharply in the second half of the year.

Upstart blames that slowdown on rising interest rates, which have throttled demand for new loans while forcing its partnered banks, credit unions, and auto dealerships to stop funding so many loans. Therefore, its core business -- which charges those lenders service fees for accessing its platform -- will continue to deteriorate as long as interest rates are rising.

Upstart initially only connected its lending partners to potential customers, which kept that debt off its own balance sheet. But this August, it declared it would start funding some of those loans on its own until the macro situation improved. That abrupt shift is risky, since its revenue growth is already decelerating and analysts expect it to turn unprofitable this year.

Upstart's stock looks cheap at just two times this year's sales. However, that depressed valuation suggests that a lot of investors aren't quite convinced that its business model can survive the upcoming rate increases.

The better buy: PayPal

I'm not enthusiastic about either of these stocks right now. PayPal's track record of over-promising and under-delivering has cast a dark cloud over its forward estimates, while Upstart's business model clearly wasn't designed to withstand a sudden spike in interest rates. But if I had to choose one over the other, I'd stick with PayPal because it's growing faster, it's firmly profitable, and its stock is cheap. PayPal's massive user base of 429 million active accounts also gives it plenty of room to roll out new services and grow its revenues -- provided that its management doesn't keep tripping over its own feet.