In this article, I evaluate two online lending stocks: SoFi Technologies (SOFI) and Upstart Holdings (UPST). In preview, I am bearish on both securities.
SoFi is an online personal finance and bank holding company that offers lending and financial services products such as student loans and mortgages. Upstart Holdings provides a proprietary, cloud-based lending platform powered by artificial intelligence (AI) that connects consumers seeking loans with a network of bank partners.
Shares of SoFi Technologies have risen 35% over the last three months. The stock is roughly flat year to date and up 20% over the past 12 months. Meanwhile, Upstart stock has surged 82% over the last three months and its share price is up 33% year to date.
Both stocks are rising due to recent interest rate cuts by the U.S. Federal Reserve. However, SOFI stock also got a lift from news of a $2 billion loan deal with Fortress Capital. Upstart made a similar $2 billion deal with Blue Owl Capital (OWL) on consumer credit.
SoFi Technologies (SOFI)
Evaluating SoFi Technologies is complicated, which is why I’m pessimistic about the stock. On one hand, SoFi Technologies should benefit from falling interest rates. However, after the recent share price surge and considering SoFi’s price-to-book (P/B) value, a bearish view seems appropriate.
SoFi’s exposure to a wide array of lending and even banking services, including personal loans, mortgages, student loans, and checking and savings accounts, provides some protection in a downturn. However, what’s been truly remarkable about this company is that it managed to grow its numbers even while interest rates have been high. In this year’s second quarter, the company’s net interest income grew 42% year-over-year to $412.6 million on the back of higher loan yields.
Now that the Federal Reserve has cut interest rates for the first time since the onset of the Covid-19 pandemic in 2020, we could see even further growth for SoFi as the cost of lending comes down. The $2 billion deal to use Fortress Investment funds to originate personal loans is likely to result in significant growth going forward. While this is all good news, SoFi stock has soared too high too fast in the last few days. In fact, SoFi stock is now in overbought territory with a Relative Strength Index of 80.5. Finally, with a P/B value of 1.8x, SOFI looks expensive.
What is the Price Target on SOFI stock?
SoFi Technologies has a Hold consensus rating based on five Buy, six Hold, and three Sell ratings assigned over the last three months. At $8.27, the average SoFi Technologies stock price target implies downside potential of 17.63%.
Upstart Holdings (UPST)
Like SoFi, there is a lot to like about Upstart Holdings. However, the sudden surge in the company’s share price, its lack of scale, and its high P/B value makes me bearish at this time. Upstart has benefited greatly from the company’s use of AI on its lending platform. However, the company offers fewer loan types and services than SoFi, primarily consisting of personal loans and auto loan refinancing. Importantly, Upstart is not a bank like SoFi.
Upstart also doesn’t have the scale that SoFi does, boasting three million customers to SoFi’s 8.8 million. Further, Upstart posted a net interest loss of about $5 million in its latest quarter, putting it even further behind SoFi. After the recent run-up in its share price, Upstart is also in overbought territory with a Relative Strength Index of 79.5. Finally, Upstart’s P/B value of 8.1x is simply far too expensive, especially considering the concerns I’ve mentioned.
On the positive side, Upstart has struck deals to fund personal loan originations with Blue Owl Capital, Castlelake, and Centerbridge Partners, all of which should help grow its business. The Blue Owl deal was announced earlier in October and involved a programmatic purchase commitment from funds managed by Blue Owl, which will purchase up to $2 billion in consumer loans on the Upstart platform over the next 18 months. An initial $290 million personal loan portfolio acquisition in connection with the deal closed in September.
What is the Price Target on UPST stock?
Upstart Holdings has a Moderate Sell consensus rating based on one Buy, six Hold, and five Sell ratings assigned over the last three months. At $25.43, the average UPST price target implies downside potential of 53.72%.
Conclusion: Bearish on SOFI and UPST
When Wall Street gets excited about some news headline, it sends stock prices through the roof with irrational exuberance. That appears to be what’s happened with SoFi Technologies and Upstart Holdings. However, a clear winner emerges based on valuation and the other factors outlined above. SoFi Technologies is much closer to becoming fairly valued with its P/B value of 1.8x than Upstart’s P/B value of 8.1x, and it has a much greater scale than Upstart. Regardless, with SoFi stock up so much in such a short time period, I’d wait until things calm down before taking a position in the shares.
