Better Fintech Stocks: Upstart vs. Confirm

Upstart Holdings (UPDATE 4.48%) and Verify inventories (AFRM 2.61%) were two of the market’s hottest fintech stocks last year. Upstart went public at $20 per share in December 2020, began trading at $26, and rose to an all-time high of $390 last October. Affirm went public at $49 a share last January, started trading at $90.90 and hit a record high of $168.52 last November.

However, as of this writing, both Upstart and Affirm shares are trading at around $30 per share. Both stocks lost their luster as rising interest rates and other macro headwinds drove investors away from more expensive growth stocks. Both companies also struggled with slowing growth after their red-hot public debuts.

Image source: Getty Images.

Should contrarian investors consider buying either downbeat fintech stocks as a turnaround? Let’s examine their businesses, growth rates and valuations to decide.

The differences between Upstart and Affirm

Upstart offers a wide range of loans by analyzing non-traditional factors such as a customer’s education, field of study, GPA, standardized test scores and work history with its cloud-based artificial intelligence (AI) platform. These loans, which Upstart claims reach a wider range of customers than traditional loans, are financed by partner banks, credit unions and car dealerships.

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

Affirm offers 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, the platform performs soft credit checks to approve new “microloans” for each purchase.

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

Upstart meets interest rate headwinds

Upstart charges its lending partners fees every time the platform is available to check a customer’s creditworthiness. Its total number of bank partner loans increased by 40% in 2020, and then rose by 338% to 1.31 million in 2021. The conversion rate, or the percentage of platform requests that convert into actual loans, also improved from 15% to 24%.

The upstart’s revenue rose 42% to $233.4 million in 2020, then rose 264% to $848.6 million in 2021. Its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) grew 463% to 31, $5 million in 2026, then rising 3% in 2020. $231.9 million in 2021.

Unfortunately, Upstart’s growth slowed significantly in the first half of 2022 as rising interest rates dampened the market’s appetite for new loans. The macroeconomic challenges also led to the lending partners taking a more cautious approach in financing new loans.

As a result, analysts expect Upstart’s revenue to rise just 28% to $1.08 billion this year and adjusted EBITDA to fall 42% to $134 million. On a GAAP basis, net income is projected to fall 82% to $24.5 million.

Affirm is facing an existential crisis

Affirm generates most of its revenue from merchant fees and interest payments from customers. Many companies have promoted BNPL services as a cheaper way to make large purchases, and the growing 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 the number of active consumers grew 97% to 7.1 million. However, net loss widened from $112.6 million to $430.9 million as it significantly increased stock-based compensation expense.

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

For the full year, Affirm sees revenue increasing by 53%-54%, but analysts expect the GAAP net loss to increase to $694 million. Looking ahead, weak consumer spending is likely to dampen growth across the BNPL market, and a painful recession could also cause Affirm’s default rates to rise, highlighting the troubling fact that it is essentially a subprime lender.

The valuations and the judgment

The upstart’s stock overheated last year, but it now looks pretty cheap at just twice 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 any of these battered fintech plays, but Upstart is clearly a more compelling buy than Affirm.