Upstart or SoFi: which stock will be a credit to investor portfolios?

The Upstart share price has been on a downward trajectory since the end of last year as inflationary worries and a shift from growth stocks weighed on investor sentiment. Rival SoFi Technologies has also seen a decline since November 2021, but strong fourth-quarter earnings for both companies mean they could be trading at a discount.

Upstart [UPST] and SoFi [SOFI] are two fintech stocks competing in the burgeoning personal finance space. Upstart uses artificial intelligence to inform lending decisions, working through thousands of data points to determine loan eligibility. The platform connects customers looking for loans with the banks offering them, making money through a referral fee. 

SoFi started as a peer-to-peer lending network and now positions itself as a one-stop shop for personal finance needs, offering everything from loans to insurance products.

Inflationary fears and central banks raising interest rates have been putting pressure on Upstart and SoFi’s share prices. Last week the US Federal Reserve increased interest rates in what it has signalled is the first of several rises set to occur this year. The central bank raised interest rates by 0.25% from near zero, and some have estimated that the figure could go as high as 2% this year.

High inflation typically leads to interest rate hikes, which can hit future earnings — a problem for growth stocks, which depend on investors taking a risk on a company becoming profitable. The lenders could also be exposed to loan defaults, as higher interest rates make paying off loans harder for customers.

Sanjay Datta, CFO at Upstart, told analysts during its fourth-quarter earnings call that a moderate increase in interest rates would not have “a meaningful impact” on business — the reasoning being that the Fed’s rate does not “not translate directly into higher cost of funding for [Upstart’s] bank partners”. Datta added that any decrease in loan demand from borrowers reacting to rate hikes would be offset by “demand for credit in the broader economy as stimulus evaporates”.

Upstart and SoFi share price performance  

Shares in Upstart and SoFi have underperformed for some time. In the year to 21 March, Upstart shares fell 16.8%, while SoFi’s dropped by 39.5%. Both stocks have lagged the performance of the wider Nasdaq, which has fallen 11.5% this year. Over the 12-month period, Upstart has dropped 23.7%, compared to SoFi’s 47.6% decline. 

The selloffs could represent a buying opportunity. While JMP Securities analyst Ronald Josey lowered his price target on Upstart to $245 from $315 following Q4 results, this is still a hefty upside on 21 March’s closing price of $125.85. The analyst kept his ‘outperform’ rating on the stock, saying that despite concerns over rising interest rates and demand for loans, Upstart should continue to grow.

Share price performance has also been improving in March. Between 14 March and 18 March, the stocks dramatically recovered, with Upstart up 40.4% and SoFi up 24.5%.

Strong fourth-quarter earnings

Upstart posted revenue of $305m in the fourth quarter, up 252% year-over-year. Total fee revenue was $287m, an increase of 240% year-over-year. GAAP net income was $58.9m, up from $1m in the fourth quarter of 2020. Upstart expects revenue to be between $295m and $305m in the first quarter of 2022, with net income of $18m to $22m.

SoFi delivered adjusted net revenue of $280m in the fourth quarter, up 54% year-over-year. Adjusted EBITDA was $5m — its sixth consecutive positive quarter.

SoFi is guiding for adjusted net revenue of between $280m to $285m for the first quarter 2022, up 30–32% year-over-year. This includes a $30m to $35m negative impact from an unexpected extension of a federal student loan payment moratorium to 1 May 2022.

In February, SoFi picked up bank processing business Technisys in a $1.1bn all-stock deal. The hefty price tag will dilute the stock, but longer-term, SoFi says that the acquisition will generate between $500m and $800m in additional revenue by 2025 as it sells the service to traditional banks.

Analysts see upside in Upstart and SoFi

Analysts see potential in both Upstart and SoFi. Nat Schindler, an analyst at Bank of America, gave Upstart a double ratings upgrade on 17 February. Schindler moved his rating to ‘buy’ from ‘underperform’, pinning a $255 price target on the stock. Schindler cited strong earnings and the possibility that guidance could be conservative.

Citi’s Ashwin Shirvaikar reiterated his ‘buy’ rating and $20 price target after SoFi’s fourth-quarter earnings. The analyst suggested that the acquisition of Technisys and an assumed end of the loan moratorium should keep the company’s growth story going.

Not so optimistic is Betsy Graseck, analyst at Morgan Stanley, who trimmed her price target on SoFi to $10 from $18 in March, pointing to the possibility that the federal student loan moratorium could again be extended into 2023.

Upstart has a $237.50 median price target from analysts polled by CNN Money, suggesting an 88.7% upside on Monday’s close. SoFi has a $16.50 price target, suggesting a 72.4% upside.