Technology creates many opportunities in the financial sector, paving a path for new companies. Digital bank SoFi Technologies (SOFI +2.10%) and artificial intelligence (AI)-powered lending company Upstart Holdings (UPST +4.47%) are two such examples.
But while each company's future looks bright, the stocks have stressed investors with tremendous volatility. Today, both stocks trade well off their highs, giving investors a potential buying opportunity for the long term.
Is one a better buy than the other? It turns out there's a clear winner. Here is what you need to know.
Upstart: Venturing into the unknown
Upstart is a company that uses artificial intelligence-based models to approve borrowers for loans. Upstart management believes the credit score is outdated. The company says it can better qualify borrowers, especially those a traditional credit score might overlook because it uses over a thousand data points to determine creditworthiness.
NASDAQ: UPST
Key Data Points
Upstart doesn't want to hold on to its loans; it wants to sell them to investors or refer them to lenders in its partner network. Business was booming when low rates created a hungry appetite for Upstart's loans, but demand has dried up over the past 18 months. The company has had to hold on to some of its loans and restructure to save money. That helped non-GAAP net losses come in at just $5.4 million in the second quarter. Upstart has $510 million in cash on hand, plenty to fund the business.
Today, Upstart's stock is brimming with potential, but it comes with some risks. The company is working to get through this more challenging economic environment of higher interest rates. Most of its business is personal loans, which might not be appealing to debt investors and banks in a potential recession. Upstart is branching out, but that will take time, requiring investors to have patience.
SoFi: A new way to bank
You might already be familiar with SoFi if you have student loans. Refinancing student loans was SoFi's primary business before the pandemic caused a freeze on payments. Today, SoFi is much more than that. It's a digital bank with a smartphone super app that offers banking products and services, including savings and deposits, peer-to-peer payments, investing, education, and more.
NASDAQ: SOFI
Key Data Points
SoFi's digital model sets it apart from many of the traditional banks. For example, it doesn't have to pay for brick-and-mortar branches. Users can bank as needed through the app. This makes cross-selling products easy, because you might initially use SoFi for one product but gradually explore the rest of the app. It also awards users points for logging in and using products, which can be redeemed for shares of a stock or toward loan payments.
Customers are rapidly embracing SoFi's model. Memberships have grown from just over 1 million in early 2020 to 6.2 million in Q2 2023. The stock hasn't reflected SoFi's solid performance, which could be related to an overall bearish sentiment toward fintech stocks in this higher-rate environment. However, higher rates can (and do) boost profits for banks like SoFi, so the market could have it wrong.
Why this company is the clear winner
While each company has significant growth opportunities over the long term, SoFi emerges as the better stock to buy today. This simply boils down to two companies having different experiences in this economic climate. Upstart is trying to change the way lenders identify risk, which is a potentially tough sell at a time when people are struggling with inflation, and banks are being more cautious. This shows up in Upstart's struggle to sell the loans it approves.
Meanwhile, SoFi has seen its net interest profits -- the difference between interest paid on deposits and collected on loans -- explode higher as rates rise. The student loan freeze just ended, which could be another catalyst for the business as pent-up demand for student loan refinancing begins trickling down to SoFi's numbers. If that wasn't enough, SoFi's member growth is still red-hot, including 584,000 new members in Q2, a 44% year-over-year uptick.
Sure, Upstart has long-term potential, and that's worth investigating more closely. But on the other hand, SoFi is already converting that potential into tangible business results, which should begin rewarding shareholders.
