The COVID-19 pandemic increased the popularity of financial technology or fintech, with lockdowns becoming the accelerator of digital finance adoption. However, a large population is still more comfortable with the traditional methods of payments and may prefer those over digital payment methods if given a choice. Thus, there remains uncertainty regarding whether the recent behavioral shift toward digital financial transactions will be sustained or not.
Community banks, the traditional fintech competitors, have ramped up technology spending by a median of 10% over the past year. On average, banks are expected to spend $1.69 million on technology in 2021. Banks also have eased credit standards for households and businesses by lowering rates and expanding credit lines.
So, given the industry’s competitive threats, we think it may be best to avoid popular fintech stocks Upstart Holdings, Inc. (UPST) and SoFi Technologies, Inc. (SOFI), which look overvalued at their current price levels.
Upstart Holdings, Inc. (UPST)
UPST operates a cloud-based artificial intelligence (AI) platform that connects individuals, banks, and institutional investors in an effort to increase access to credit and reduce risk and cost. The San Mateo, Calif., company went public through a traditional IPO process on December 16, 2020.
On October 27, Four Corners Community Bank (FCCB) announced its partnership with UPST to serve local communities better by providing a more automated and digital experience. However, the gains from this partnership might be stretched out over a prolonged period.
In terms of forward GAAP P/E, UPST is currently trading at 252.18x, which is 2,132.4% higher than the 11.30x industry average. Its 34.30 forward Price/Book multiple is 2,577.5% higher than the 1.28 industry average.
For its third fiscal quarter, ended September 30, UPST’s total revenues increased 249.5% year-over-year to $228.45 million. However, its total operating expenses increased 276% from the same period last year to $199.85 million. For the nine months ended September 30, the company’s net cash provided by investing activities decreased 197.2% year-over-year to negative $124.10 million. Analysts expect its EPS to come in at $0.29 for the current quarter (ending December 2021).
The stock has declined 20.9% in price over the past month and 25.8% over the past five days to close yesterday’s trading session at $246.02.
UPST’s POWR Ratings reflect this bleak outlook. The stock has an F Stability grade, and a Value grade of D. In the 151-stock Financial Services (Enterprise) industry, it is ranked #84. The industry is rated D. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Click here to see the additional POWR Ratings for UPST (Growth, Momentum, Sentiment, and Quality).
SoFi Technologies, Inc. (SOFI)
SOFI, in San Francisco, is a finance company that operates a platform that functions as a financial services provider and provides student loans, personal loans, auto loans, mortgage loans, and investments to its customers. The company went public in a reverse merger with Social Capital Hedosophia Holdings Corp. V on June 1, 2021.
On November 9, SOFI launched a strategic partnership with the Financial Planning Association® (FPA®), a membership association for certified planners, to provide FPA members access to financial solutions. However, it might take some time for significant gains to materialize from this venture.
SOFI’s 510.44x forward Price/Cash Flow multiple is 4,597.7% higher than the 10.87x industry average And, in terms of forward Price/Sales, the stock is currently trading at 18.22x, which is 414% higher than the 3.55x industry average.
SOFI’s non-interest expense increased 24% year-over-year to $301.87 million in its third fiscal quarter, ended September 30. Its net loss and loss per share for the period stood at $30.05 million and $0.05, respectively. And its adjusted EBITDA decreased 69.4% from the prior-year quarter to $10.26 million. The Street expects the company’s EPS to remain negative at least until the following year.
SOFI’s stock has gained 1.7% in price over the past five days to close yesterday’s trading session at $22.97.
SOFI’s POWR Ratings reflect its poor prospects. The stock has an overall D rating, which equates to Sell in our proprietary rating system. The stock has an F grade for Value, and a D grade for Growth, Stability, and Quality. SOFI is ranked #143 in the Financial Services (Enterprise) industry.
To see the additional POWR Ratings for Momentum and Sentiment, click here.
UPST shares were trading at $253.00 per share on Friday afternoon, up $6.98 (+2.84%). Year-to-date, UPST has gained 520.86%, versus a 26.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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