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Better Fintech Stock: Upstart vs. Affirm

Upstart Holdings (NASDAQ: UPST) and Affirm Holdings (NASDAQ: AFRM) were two of the market's hottest fintech stocks last year. Upstart went public at $20 per share in December 2020, started trading at $26, and soared to an all-time high of $390 last October. Affirm went public at $49 per share last January, started trading at $90.90, and hit an all-time high of $168.52 last November.

But as of this writing, Upstart and Affirm stocks both trade at around $30 per share. Both stocks lost their luster as rising interest rates and other macro headwinds drove investors away from pricier growth stocks. Both companies also grappled with slowing growth following their red-hot public debuts.

Image source: Getty Images.

Should contrarian investors consider buying either beaten-down fintech stock as a turnaround play? Let's examine their businesses, growth rates, and valuations to decide.

The differences between Upstart and Affirm

Upstart provides a wide range of loans by analyzing nontraditional factors like a customer's education, area of study, GPA, standardized test scores, and work history with its cloud-based artificial intelligence (AI) platform. Those loans, which Upstart claims reach a broader range of customers than traditional loans, are funded by its partner banks, credit unions, and auto dealerships.

That approach could disrupt legacy credit reporting services, which primarily examine a customer's FICO score, debt, and annual income to gauge a customer's creditworthiness. It could also make it easier for younger customers with limited credit histories to secure new loans.

Affirm provides buy now, pay later (BNPL) services as an alternative to traditional credit card payments. Instead of accessing a centralized payment network to process a payment, its platform performs soft credit checks to approve new "microloans" for each purchase.

Affirm then splits each purchase into smaller payments without any hidden or late fees, and calculates the interest payments with a fixed dollar amount instead of compounding percentages. Those installments can make it easier for customers to make large purchases without using any credit cards.

Upstart faces interest-rate headwinds

Upstart charges its lending partners fees whenever its platform is accessed to check a customer's creditworthiness. Its total number of bank partner loans increased 40% in 2020, then surged 338% to 1.31 million in 2021. Its conversion rate, or the percentage of platform inquiries that are converted into actual loans, also improved from 15% to 24%.

Upstart's revenue rose 42% to $233.4 million in 2020, then jumped 264% to $848.6 million in 2021. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) grew 463% to $31.5 million in 2020, then soared 636% to $231.9 million in 2021.

Unfortunately, Upstart's growth decelerated significantly in the first half of 2022 as rising interest rates curbed the market's appetite for new loans. The macroeconomic challenges also caused its lending partners to take a more cautious approach in funding new loans.

As a result, analysts expect Upstart's revenue to only increase 28% to $1.08 billion this year, and for its adjusted EBITDA to decline 42% to $134 million. On a GAAP basis, its net income is forecast to tumble 82% to $24.5 million.

Affirm faces an existential crisis

Affirm generates most of its revenue from merchant fees and interest payments from customers. Many businesses have been promoting BNPL services as a cheaper way to make big purchases, and that increasing awareness has helped Affirm grow like a weed over the past two years.

Affirm's revenue rose 71% to $870.5 million in fiscal 2021, which ended last June, as its number of active consumers grew 97% to 7.1 million. However, its net loss widened from $112.6 million to $430.9 million as it significantly boosted its stock-based compensation expenses.

Affirm ended the third quarter of fiscal 2022 with 12.7 million active consumers and a whopping 207,000 active merchants, which was mainly a result of its integration into Shopify's Shop Pay Installments. But its growth is still slowing down and it remains deeply unprofitable.

For the full year, Affirm sees its revenue rising 53%-54%, but analysts expect its GAAP net loss to widen to $694 million. Looking ahead, sluggish consumer spending will likely curb the growth of the entire BNPL market, and a painful recession could also cause Affirm's delinquency rates to rise, which would highlight the troubling fact that it's essentially a subprime lender.

The valuations and verdict

Upstart's stock got overheated last year, but it now looks fairly cheap at just two times this year's sales. Meanwhile, Affirm still doesn't look like a bargain at seven times this year's sales. I wouldn't rush to buy either of these battered fintech plays, but Upstart is clearly a more compelling buy than Affirm.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Affirm Holdings, Inc., Shopify, and Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac and recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.


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