Insights

Here’s Why SoFi, Affirm, and Upstart Are Rising This Week

What happened

Several fintech stocks bounced higher this week, apparently due to the market’s upbeat response to the second-quarter report that digital bank SoFi Technologies (NASDAQ: SOFI) delivered Tuesday.

For the week, shares of SoFi were up by roughly 30% at the close of trading Thursday, according to data provided by S&P Global Market Intelligence. Shares of the “buy now, pay later” (BNPL) company Affirm (NASDAQ: AFRM) traded nearly 20% higher, and shares of the artificial intelligence lender Upstart (NASDAQ: UPST) were up by about 18%.

So what

SoFi reported a net loss of $0.12 per diluted share on total revenue of $362.5 million, with revenue beating analysts’ consensus estimates for the quarter.

The company also raised its 2022 guidance slightly; it now expects to generate adjusted net revenue of between $1.508 billion and $1.513 billion for the year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are now expected to land in the $104 million to $109 million range.

In the quarter, SoFi added more than 450,000 new members, bringing its total to more than 4.3 million. The digital bank also had its second-highest quarter of new lending, and with 702,000 new product additions, it was the second-best quarter of growth on that metric too. Galileo, one of SoFi’s tech businesses, added 7 million new accounts and now has 117 million total.

SoFi also took advantage of the national bank charter it obtained earlier this year. That enables it to hold loans on its balance sheet longer and collect recurring interest payments, rather than selling them. In its first full quarter, SoFi Bank generated a roughly $25 million profit.

After SoFi delivered its quarterly results, shares of Affirm and Upstart seemed to rise in sympathy with it. While all three are in the fintech industry, they have very different business models.

SoFi serves a much higher-quality demographic of borrowers and seeks to cross-sell them multiple products. Upstart serves borrowers across a range of the traditional creditworthiness spectrum and mainly does so by helping them get personal loans. Affirm, as a BNPL company, enables customers of various retailers to purchase items with no money down and then pay for them in multiple installments, sometimes interest free. The company wants to do this on a large scale.

Upstart reported the headline numbers for its second quarter earlier this month and ahead of schedule, significantly lowering its guidance for the period. Affirm will report earnings later this month.

Now what

Again, all three of these companies are quite different, so a good quarter for SoFi doesn’t guarantee a good quarter for Upstart or Affirm.

Upstart shares sold off heavily after it reported the broad strokes of its second quarter early, and Affirm may face issues as well, so investors may be rallying around the two this week based on a more positive macro outlook. It’s possible investors are less worried that a deep recession is coming, or they may think the Federal Reserve will ease up on the aggressive pace of its interest rate hikes.

But I don’t think Affirm and Upstart are safe just yet. The market has priced in some of their downsides, but both companies could still face funding and credit quality issues this year. I think SoFi is the better pick to buy here, although its valuation is by no means cheap.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Affirm Holdings, Inc. and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

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