Most likely to 5x first: Upstart vs. Pagaya


As we near the end of 2022, fintech is still floundering. Cathie Wood’s ARK Invest fintech innovation exchange-traded funds, for example, is down 57% this year.

Many fintech stocks have disappointed as their strong growth streaks come to an end. But at least part of the slowdown looks like a temporary pause in a tough economy, and big gains could be on the horizon. Reached (UPST -5.74%) investors have lost a lot this year, with an 83% drop in 2022. But 10 years from now, it could be a huge winner. Newcomer Padaya (PGY -28.65%)which is very similar to Upstart, has been up slightly since its IPO through a special purpose acquisition company deal in June.

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

Upstart: beaten by new challenges

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

It’s ironic to call Upstart the more established of the two stocks, since it only went public at the end of 2020. But it’s taken a lot of shareholders since then, and nearly two years, that’s longer than three months.

When it went public, Upstart was showing fabulous growth. This achieved four-digit year-over-year sales growth in one quarter last year. But he faced challenges as the economy deteriorated. Revenue growth slowed to 18% year-over-year in the second quarter of 2022 after rising more than 1,000% last year, with a loss of $32 million after many quarters of profits . Management also expects revenue to slow further in the third quarter.

The stunning fall reveals a potential crack in the company’s model, which it describes as utterly superior to traditional credit scoring models. Upstart says, for example, that using its model, credit partners can approve 75% more loans at the same default rates.

However, in the current environment, where interest rates are rising and the risk of default is higher, Upstart’s model may not offer the same benefits to lenders. Lenders are paying more attention to approvals, and Upstart isn’t accepting as many business as loan approvals are slowing down.

Management insists its model is better and will outperform other loans over time. However, like banking stocks, which move cyclically in line with the economy, it is sensitive to short-term economic trends. Management has reassured investors that this is a small-cap model with high margins and plenty of cash to go with it.

But it’s a risky stock to own right now. It’s still a relatively young company, and machine learning means it will likely improve over time, but it’s important to keep in mind that it will take time.

Pagaya: Grow faster?

As Upstart focuses on personal and auto loans, with plans to take out mortgages next year and then in other areas, Pagaya already has its finger in plenty of pies. It counts Visa as one of its credit card partners, and it works with personal loans, car loans, credit cards and real estate.

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

This has translated into robust growth, even in the current volatile macroeconomic environment. Revenue grew 83% year-over-year to $352 million in the second quarter of 2022, with network volume up 79%. Upstart posted revenue of $228 million in the second quarter. Pagaya’s net loss increased from $6 million last year to $146 million this year, with increased expenses due to scaling and IPO-related costs.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose from $7 million last year to $5 million this year. Management expects third-quarter revenue of $700 million to $725 million and a wide range of adjusted EBITDA from a loss of $20 million to $10 in profit. This compares to 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 hike cycle and reacted accordingly, adjusting 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 is 1.72%.

Which stock is likely to gain 400% faster?

Upstart is unfortunate to show declining revenue growth while Pagaya is just getting started. Investors are pessimistic about Upstart stock at the moment, while Pagaya is more of an unknown – it has only released one earnings report since going public. And this report shows a very promising company. Based on this limited data, Pagaya looks stronger right now.

In this type of environment, however, either company is unlikely to grow fivefold in the near future. But they both have the potential to do so in the long run.

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