The money lending industry in the United States has transformed as access to affordable credit becomes easier. As banks’ old credit systems fail to properly identify and quantify risk when it comes to lending, one-stop financial apps or platforms are entering the market to help people to obtain credit. People are increasingly opting for student loans, home loans, car loans, insurance and using different financial services through these platforms.
According to a Research and Markets report, the total value of transactions in the personal finance industry is expected to grow at a compound annual growth rate (CAGR) of 23.1% between 2019 and 2024.
Let’s compare two such fintech companies, Upstart Holdings and SoFi Technologies, using stock comparison tool TipRanks, and see what Wall Street analysts are saying about these stocks.
Upstart shares soared 35.6% on Wednesday to close at $148.01, after the artificial intelligence (AI)-based lending platform had a bumper 2021. The company posted triple-digit revenue growth of 252% year-over-year to post revenue of $305. million in the fourth quarter.
This strong revenue growth was driven by Upstart’s fee revenue of $287 million, again posting an exceptional 240% year-over-year growth.
It is important here to consider how UPST earns its revenue. The company charges referral fees to banks for each loan referred through the Upstart.com website and issued by a banking partner. UPST also charges platform fees for each loan issuance, regardless of source, and service fees for loans as consumers repay them.
Upstart Holdings Co-Founder and CEO Dave Girouard commented on the results, “I’m also pleased to report that with the help of an epic push from our team over the last few weeks of the year , auto loan originations on our platform are rapidly ramping up and will provide growth opportunities for Upstart for years to come.
Company management also pointed out during its earnings call that with the surge in fourth quarter revenue, UPST was on track to earn “more than $1 billion in revenue on an annualized basis.”
Additionally, fourth-quarter adjusted earnings came in at $0.89 per share, well above analysts’ estimate of $0.51 per share.
Additionally, the company is forecasting FY22 revenue of $1.4 billion, a 65% year-over-year growth rate. This outlook is even higher than Wedbush analyst David J. Chiaverini’s projection of revenue of $1.36 billion and a consensus growth rate of 50%.
That bullish outlook aside, the only thing Chiaverini was concerned about was that UPST defaults were increasing. The company’s management said on its earnings call that “with each successive vintage coming from our platforms, the absolute level of default increases, and this is reflected in our securitizations.”
Here, the vintage refers to the month or quarter in which the loan was granted.
Chiaverini pointed out that the increase in delinquencies affected UPST’s loan securitization issuance, which fell to $100 million in the first quarter to date from $800 million in the fourth quarter, citing data from Finsight.
Securitization is the process of converting a batch of loans into marketable securities. It is important to note here that rising default rates can impact securitization cash flows.
Additionally, Chiaverini cited Finsight data to point out that 27% of UPST loans were funded by securitizations last year, “which is not an intangible level, in our view.”
Interestingly, while Upstart management noted on its fiscal fourth quarter earnings call that rising delinquency rates were “not a bad thing,” analyst Chiaverini remained concerned “about the company’s funding profile if the deteriorating trajectory of its delinquency rates does not normalize in the coming months. ”
Another concern for the analyst was that Upstart’s loan underwriting model has yet to work during a real recession, meaning it hasn’t been “battle tested” yet.
As a result, the analyst stayed away from the stock with a Hold rating with a price target of $110 (down 25.7%).
However, other analysts on the street are cautiously bullish on the stock, with a moderate buy consensus rating based on 6 buys and 3 takes. Upstart Holdings’ average stock forecast of $213.33 implies approximately 44.1% upside potential from current levels for this stock.
SoFi offers a suite of financial products through its platform, a one-stop-shop application, and its main business segments include lending and financial services. Over the past month, the stock has risen 8.5%, following the announcement of its regulatory approval by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve to become a bank holding company.
The company will become a national bank through its acquisition of Golden Pacific Bancorp and will operate its banking subsidiary as SoFi Bank, National Association. The company completed its acquisition of Golden Pacific Bancorp earlier this month.
SoFi CEO Anthony Noto said the banking charter would allow the company to “lend at even more competitive interest rates and offer our members high-yield interest for checking and savings.” “, and to add to its portfolio of financial products and services. .
SoFi is expected to announce its fourth quarter results on March 1. Since SoFi’s regulatory approval to become a bank was seen by many analysts as a significant catalyst, let’s take a look at what analysts are saying after the approval.
Rosenblatt Securities analyst Sean Horgan saw the news, “As the primary driver of SOFI’s expected outperformance over the next 12 months.” As a result, the analyst revised his estimate of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for 2022 from $48 million to $235 million with upside potential.
Horgan’s Adjusted EBITDA estimate assumes that “full bank charter benefits begin mid-year and SOFI achieves approximately 50% of the originally projected EBITDA impact.”
The analyst has a buy rating and a price target of $25 on the stock.
However, Credit Suisse analyst Timothy Chiodo stayed away from the stock with a Hold rating, as the analyst remained concerned about SoFi’s gain-on-sell (GoS) margin. Chiodo believes that SoFi’s GoS margin is likely to decline in the fourth quarter due to peers posting compressed GoS margins due to increasing competition as the gap between the primary and secondary mortgage markets narrows.
The GoS margin refers to the difference between the costs of originating the loan for the bank or lender and the cost at which the lender sells the loan.
The analyst has a price target of $16.50 (up 26.2%) on the stock.
The rest of the street analysts are cautiously bullish on the stock with a Moderate Buy consensus rating based on 8 buys and 3 takes. The average SoFi stock forecast of $18.86 implies approximately 44.2% upside potential from current levels for this stock.
Analysts are cautiously bullish on both stocks and based on the upside potential over the next 12 months, both stocks look like a buy.
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