Upstart (UPST 2.09%) is a true innovator. The entire business model centers on leveraging artificial intelligence (AI) to improve the lending process, with expanded access to credit for borrowers and more revenue-generating potential for its more than 100 banking partners. This hasn't helped the share price, though, which is down 88% from its peak (as of Dec. 29).
Should investors who want exposure to the financial services industry forget about this fintech stock and instead buy shares in American Express (AXP 0.36%), a proven winner and longtime favorite of Warren Buffett? Here's what investors need to know about both businesses.
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Upstart is solving a problem with AI
During the past three years, AI has been the single hottest topic in the economy and markets. Upstart, founded in 2012, was way ahead of the curve, as this technology has been a primary strategic pillar for the business well before it became mainstream. Upstart has found product market fit with AI, applying its lending platform to disrupt the financial services industry.
Compared to traditional FICO scores that look at a handful of factors about potential borrowers, Upstart analyzes 2,500 different variables to gain a more thorough understanding repayment ability. Since its founding, the company has helped to originate $50 billion worth of loans, with a presence in the personal, auto, HELOC (home equity lines of credit), and short-term lending markets. And in the third quarter, 91% of loans were fully automated.
The issue is that Upstart's financial results are extremely cyclical. Revenue dipped 39% in 2023, due to rising interest rates. The business reported a $240 million net loss that year. But things have improved, with the top line growing 71% in the third quarter. Upstart has also registered positive generally accepted accounting principles (GAAP) earnings in two straight quarters. Time will tell if this is a new normal for the company.
American Express dominates the credit card space
American Express continues to operate from a position of strength. In the latest quarter (Q3 2025), revenue (net of interest expense) increased 11% year over year to $18.4 billion. This was driven by 9% growth in payment volume and 5.7 million net new active cards. And management expects the business to produce $15.35 (at the midpoint) in diluted earnings per share this year, which would be 10% higher than 2024.
The company's key competitive advantage might be its brand. Amex deliberately positions its credit cards at the premium end of the market, which brings in higher-income and higher-spending consumers. This keeps default rates in check. And it gives the business pricing power, as the annual fees charged to cardholders have increased over time.
There is also a powerful network effect at play. American Express runs the payment platform that connects 151 million cardholders and 160 million merchant locations. The ecosystem gets stronger as it becomes larger, providing more places to shop for cardholders and a bigger customer base for merchants. This positive feedback loop supports Amex's staying power.
Looking out at the next decade, this business will benefit from the continuing penetration of digital transactions at the expense of cash- and paper-based methods, as well as rising spending across the economy. This tailwind has helped historically, with the stock generating a total return of 242% during the past five years.
NYSE: AXP
Key Data Points
The best investment opportunity comes down to individual risk and objectives
Upstart shares are trading well off their peak, resulting in what might appear to be a more attractive entry point that provides greater potential upside. Of course, this depends on the company achieving strong growth and consistent levels of profitability, both of which are highly uncertain outcomes. Investors who desire outsize returns and who are willing to take on more risk will gravitate to Upstart.
On the other hand, American Express makes sense for risk-averse investors. This is a proven winner, holding a dominant position in the credit card market. It still possesses solid growth potential, and its profitability has always been impressive. But the current valuation, at a price-to-earnings ratio of 25.3, isn't exactly a bargain.
Both of these stocks have their own merits, depending on what factors hold more weight for you.
