More Likely to 5x First: Upstart vs. Pagaya

As we approach the end of 2022, fintech continues to falter. ARK Invest by Cathie Wood fintech innovation exchange-traded fund, for example, is down 57% this year.

Many fintech stocks have disappointed as their high-growth streaks have come to an end. But at least part of the slowdown looks like a temporary pause in a struggling economy, and big gains could be on the horizon. Upstart (UPST -5.74%) Investors have lost a lot this year, with the stock down 83% in 2022. But 10 years from now, it could be a big winner. Newcomer Pagaya (PGJ -28.65%)which is very similar to Upstart, has risen a bit since it went public through a special purpose company acquisition deal in June.

These companies have very similar business models and both have strong growth prospects. Which stock is most likely to earn five times its price first?

Upstart: Defeated by new challenges

Upstart and Pagaya offer artificial intelligence (AI)-based credit scoring systems to expand credit for borrowers without compromising risk for lenders.

It’s ironic to call Upstart the more established of the two stocks, since it only went public in late 2020. But it’s taken shareholders for quite a ride ever since, and almost two years is longer than three months.

When it went public, Upstart was seeing tremendous growth. That came to a four-digit year-over-year sales growth figure in a quarter last year. But it has been facing challenges as the economy has deteriorated. Revenue growth slowed to 18% year-over-year in the second quarter of 2022 after growing more than 1,000% last year, with a loss of $32 million after many quarters of profit. Management is also targeting a further slowdown in revenue in the third quarter.

This surprising drop reveals a potential flaw in the company’s model, which it paints as totally superior to traditional credit scoring models. Upstart says, for example, that using its model, lending partners can approve 75% more loans with the same default rates.

However, in the current environment, where interest rates are rising and the risk of default is higher, the Upstart model may not offer the same advantages to lenders. Lenders are being more careful about approvals, and Upstart isn’t getting as much business as loan approvals slow.

Management insists its model is better and will outperform other loans over time. However, like bank stocks, which cycle in line with the economy, it is susceptible to short-term economic trends. However, management assured investors that it is a capital-light model with high margins and plenty of cash to pull it off.

But it is a risky stock to own right now. It’s still a relatively young company and machine learning means it will probably get better over time, but it’s important to note: it’s going to take time.

Pagaya: Growing faster?

While Upstart focuses on auto and personal loans, with plans to move into mortgages next year and then other areas, Pagaya already has its finger in a lot of cakes. yes account Visa as one of their credit card partners, and works with personal loans, car loans, credit cards, and real estate.

It also boasts about its differentiated funding model, saying it raises cash even before funding is approved. That was a problem for Upstart in the first quarter, when it took out some loans to maintain its balance sheet when funds began to dry up. It is an advantage for Pagaya.

This has resulted in solid growth even through the current volatile macroeconomy. Revenue increased 83% year over year to $352 million in the second quarter of 2022, with network volume up 79%. Upstart posted $228 million in second-quarter revenue. Pagaya’s net loss soared from $6 million last year to $146 million this year, with higher expenses due to scaling and costs related to the initial public offering.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell from $7 million last year to $5 million this year. Management anticipates $700 million to $725 million in third quarter revenue and a wide range of Adjusted EBITDA from a loss of $20 million to $10 in profit. That compares with Upstart’s expected $170 million in revenue and $0 in adjusted EBITDA.

Pagaya says its AI-powered system identified changes early in the interest rate increase cycle and responded accordingly, tailoring its approvals and resulting in a better default rate. He says the benchmark delinquency rate for unsecured personal loans over 30 days is 2.18%, while his own is 1.72%.

Which stock is likely to gain 400% faster?

Upstart has the misfortune of showing a drop in revenue growth while Pagaya is just getting started. Investors are bearish on Upstart’s shares at the moment, while Pagaya is more of an unknown, only posting one earnings report since going public. And that report shows a company with a lot of promise. Based on this limited data, Pagaya seems stronger at the moment.

However, in this type of environment, it is not that likely that any of these companies will win five times in the near future. But both have the potential to do so in the long run.

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