As the fintech landscape continues to expand, investors are increasingly drawn to companies that are not only innovative but also positioned to capitalize on macroeconomic shifts. Two such companies are Affirm (AFRM) and Upstart (UPST), both of which have garnered significant attention for their unique approaches to financial services. Affirm is a leader in the Buy Now, Pay Later (BNPL) market, offering consumers flexible payment options that have become increasingly popular, particularly among younger demographics. Upstart, on the other hand, leverages artificial intelligence (AI) to disrupt traditional lending practices, providing a more data-driven approach to credit approvals.
Affirm and Upstart have both shown resilience and adaptability in a challenging economic environment, and both stand to benefit from potential Federal Reserve rate cuts. Lower rates generally reduce the cost of borrowing, which could drive increased demand for consumer loans and BNPL services, directly impacting the growth prospects for both companies. However, despite these shared advantages, the two stocks present very different investment profiles, especially when considering their recent performance and current valuations.
As we enter the first week of September, the question arises: which of these fintech stocks offers the better buying opportunity? Let’s find out.
The Case For Affirm Stock
With a market capitalization of $13.6 billion, Affirm Holdings, Inc. (AFRM) is a fintech company that facilitates connections between buyers and sellers through its payment network, providing an array of financial products, including BNPL services.
The company’s business model is centered on developing personalized payment plans for consumers, while assisting merchants in boosting sales through additional transactions. Affirm’s growth has been fueled by the continued expansion of its merchant network, enhancements to its product offerings, and effective risk management strategies.
Affirm shares have climbed 14.7% over the past six months, compared to the S&P 500 Index’s ($SPX) gain of 10.8%.
On Aug. 20, Affirm announced a partnership with Hotels.com, enabling approved guests to book accommodations and pay over time using Affirm’s services, making it easier for more people to plan their dream trips. This builds on Affirm’s existing partnership with Expedia Group (EXPE), where Affirm serves as the exclusive “buy now, pay later” provider for Expedia and Vrbo.
On Aug. 13, Affirm revealed an expanded partnership with Tekmetric, a leading automotive repair shop management solution provider supporting auto repair businesses nationwide. Now, the thousands of auto repair shops utilizing Tekmetric’s platform, powered by Stripe Connect, can provide their customers with the option to pay over time with Affirm for both online and in-person auto repair services.
Affirm Stock Surges After Q4 Earnings Beat, Solid Q1 Guidance
On Aug. 28, Affirm Holdings reported stronger-than-expected fiscal Q4 results and issued above-consensus Q1 revenue guidance, propelling its shares to a gain of nearly 32% in the next trading session. The company’s quarterly revenue surged 47.9% year-over-year to $659.18 million, beating analysts’ expectations by $53.8 million. Revenue as a percentage of Gross Merchandise Volume (GMV) rose to 9.1%, up from 8.1% in the fourth quarter of 2023.
Revenue growth stemmed from higher network revenue (28% y/y), increased interest income (57% y/y), and gains from the sale of loans (116% y/y). Revenue less transaction costs (RLTC) grew 70% year-over-year to $309 million, rising by 100 basis points to 4.3% of GMV, up from 3.3% of GMV in the same quarter last year. Notably, RLTC as a percentage of GMV surpassed the company's long-term target of 3 to 4% due to the 2024-X1 securitization transaction, which contributed approximately $30 million to RLTC during the quarter.
Affirm’s GMV climbed 31% year-over-year to $7.2 billion, significantly outpacing overall e-commerce growth. GMV from its top five merchants and platform partners collectively grew 38% year-over-year, with continued gains in share of a cart. Transactions on the Affirm network increased 42% year-over-year to 24.7 million in the fourth quarter and rose 15% sequentially from the third quarter of 2024. Also, the number of transactions per active consumer continued to rise, reaching 4.9.
The company's active consumer count increased to 18.6 million as of June 30, 2024, up from 18.1 million on March 31 and 15.6 million on June 30, 2023. Additionally, the growth in active merchant count accelerated for the third consecutive quarter, surpassing 300,000 by the end of FY24.
Its adjusted operating income increased $135 million year-over-year to $150 million in Q4, driven by continued product enhancements, merchant expansion, careful risk management, and excellent capital execution. Moreover, the adjusted operating margin improved to 22.7% from 3.3% in the same quarter last year. Affirm reported a Q4 GAAP loss of $0.14 per share, surpassing the consensus estimate for a loss of $0.44 per share, and marking an improvement from a loss of $0.69 per share in the same period last year.
Overall, the company delivered outstanding results, with all key operational metrics showing improvement on a year-over-year basis. The company’s rapid scaling capabilities and its partnerships with leading digital wallets and e-commerce platforms position it well for robust growth.
Looking ahead, Affirm forecasts GMV between $7.1 billion and $7.4 billion for the current quarter, with revenue projected at $640 million to $670 million, and an adjusted operating margin of 14% to 16%. For FY25, Affirm projects GMV to exceed $33.5 billion, with an adjusted operating margin of over 18.4%, and revenue as a percentage of GMV to be at least 10 basis points higher than in FY24. The company also stated that it anticipates achieving GAAP operating income profitability in the fourth quarter of fiscal 2025.
Analysts responded favorably to the fintech’s quarterly results and guidance, with BofA, RBC Capital, and Barclays all raising their respective price targets on the stock.
It’s also worth noting that Apple (AAPL) in mid-June directly highlighted Affirm as one of its key partners in the U.S. following its decision to terminate the Apple Pay Later program, which was launched in March 2023. As a result, Affirm’s GMV as well as top- and bottom-line growth could experience an acceleration moving forward.
Analysts tracking Affirm Holdings anticipate that the company’s net loss will decrease by 37.72% year-over-year to $1.04 per share in fiscal 2025. Moreover, analysts project AFRM’s revenue to grow 29.33% year-over-year to $3.00 billion in fiscal 2025.
In terms of valuation, the company’s trailing twelve months (TTM) Price/Sales ratio stands at 5.87x, which exceeds the sector median of 3.02x, yet this metric remains below its own five-year average of 7.41x.
Analysts are split on AFRM stock, as reflected in its consensus “Hold” rating. Among the 18 analysts covering AFRM, four recommend a “Strong Buy,” 11 advise a “Hold,” one rates it as a “Moderate Sell,” and two suggest a “Strong Sell.”
Notably, the stock is trading above its average price target of $37.33, but the highest target price on the Street, at $65.00, indicates an upside potential of approximately 48% from its Friday closing price.
The Case For Upstart Stock
Valued at a market cap of $3.7 billion, Upstart Holdings, Inc. (UPST) stands out as the premier AI lending marketplace, linking millions of consumers with over 100 banks and credit unions that leverage its AI models and cloud applications to offer superior credit products.
Upstart’s AI models are driven by more than 1,600 variables, and have been trained using over 58 million past repayment records. It enables banks to assess a borrower’s risk profile accurately, potentially leading to more loan approvals and improved repayment rates.
UPST shares have soared 59% over the past six months, outperforming both AFRM and the broader SPX over this time frame.
On Aug. 28, Fibre Federal Credit Union, a Washington-based credit union with over 118,000 members and more than $1.6 billion in assets, announced a new partnership with Upstart to offer personal loans to both new and existing members.
On Aug. 14, AMOCO Federal Credit Union, a member-owned cooperative based in Texas with more than 106,000 members and over $1.4 billion in assets, unveiled a new partnership with Upstart to provide personal loans to both new and existing members.
On July 31, Mizuho Securities double-upgraded Upstart Holdings to “Outperform” from “Underperform” and lifted its price target on the stock to $31 from $17, noting “the skies might be brightening.”
“With 0 buys, 9 neutrals, 10 sells, and a short interest of ~33%, Upstart doesn’t have many fans. However, the growing likelihood of lower rates, improving borrower risk, lower UPST ABS delinquency rates, an improving UMI Index in June, and positive industry commentary are signs that conditions may be improving,” explaind analyst Dan Dolev. In addition, Mizuho increased its 2025 revenue estimate multiple for UPST to 5x from 3x.
Upstart Stock Soars After Upbeat Quarterly Results and Guidance
On Aug. 7, Upstart Holdings stock gained over 39% after the cloud-based AI lending platform reported better-than-expected Q2 results and offered solid guidance for Q3 revenue and adjusted EBITDA.
Upstart’s second-quarter revenue from fees fell 9% year-over-year to $131 million, due to higher pricing for prime loans that led to reduced origination volumes. Net interest income improved to negative $3 million, showing progress both year-over-year and sequentially. This was due to the larger-than-usual core loan balance sheet carried until late in the quarter, which generated income that helped offset the excess losses in the R&D portfolio. As a result, the company’s total revenue for the quarter came in at $128 million, marking a 6% decrease from the second quarter of 2023, and stayed flat sequentially. However, the top line exceeded Wall Street’s expectations by $3.47 million, and was $3 million higher than the company’s guidance.
In Q2, the volume of loan transactions on Upstart's platform reached approximately 144,000, a 31% increase from the previous year and a 21% rise sequentially, involving over 89,000 new borrowers. Also, conversion on rate requests rose to 15%, up from 9% in the same quarter of the previous year. This increase was primarily driven by enhanced marketing efforts, optimization of the acquisition channel for new personal and small-dollar loan borrowers, and the introduction of new product initiatives. At the same time, the average loan size decreased to $7,700 from $9,500 in the previous quarter, influenced by the strong growth in small-dollar loans and the impact of higher pricing on prime loans, which are typically larger than average.
Upstart reported a GAAP net loss of $54.5 million and an adjusted EBITDA of negative $9.3 million in Q2, both surpassing guidance and providing encouraging signs on its path back to profitability. Notably, its Q2 adjusted loss of $0.17 per share improved from a loss of $0.31 per share in Q1, and far exceeded the average analyst estimate for a loss of $0.39 per share.
For the third quarter of 2024, management expects total revenues of around $150 million. This includes fee revenues of $155 million and net interest income of approximately negative $5 million. UPST also anticipates a contribution margin of about 57% and an adjusted EBITDA of about negative $5 million. For the second half of 2024, the company anticipates fee revenue of around $320 million and expects to achieve positive adjusted EBITDA in the fourth quarter.
“The guidance we released today demonstrates that we’re on track toward resuming our role as the fintech known for high growth and healthy margins,” said Upstart’s CEO, Dave Girouard. “The improvements in our business are coming from significant advances in our AI model, a revitalized funding supply, and increased operating efficiency. These wins and more are providing the foundation for the Upstart comeback story.”
It is important to note that the company’s strides toward returning to sequential growth and EBITDA profitability were driven not by external macroeconomic improvements or reduced risk, but by internal factors. These included significant AI model advancements, a revitalized funding supply, and enhanced operational efficiency.
For instance, Upstart recently launched a new version of its core credit pricing model, Model 18, which the CEO describes as “one of the largest and most impactful improvements” to the system to date. Another advancement related to Upstart’s models is the achievement of a new automation milestone, enabling Upstart to instantly approve 91% of credit applications. Furthermore, the company rebuilt its funding supply by securing crucial long-term funding partnerships and markedly decreasing the reliance on its balance sheet to fund loans.
Overall, the company’s quarterly results and forecast indicate a positive turnaround, eliciting favorable responses from analysts. JPMorgan, Piper Sandler, and Barclays all raised their respective price targets on the stock, while Citi upgraded its rating to “Neutral/High Risk” from “Sell/High Risk.”
Analysts tracking Upstart Holdings expect the company to report a loss of $0.68 per share in fiscal 2024, with a return to profitability anticipated in fiscal 2025, forecasting earnings of $0.22 per share. Additionally, analysts expect that UPST’s revenue will rise 10.60% year-over-year to $567.98 million in fiscal 2024 and will increase 28.05% year-over-year to $727.28 million in fiscal 2025.
In terms of valuation, UPST stock is currently trading at 6.37 times TTM sales, which is below its five-year average of 7.27x, but still a premium compared to the sector median and its peer Affirm. The company will need to maintain strong lending performance and operational efficiency to justify its high valuation.
Upstart stock has a consensus “Hold” rating. Out of the 17 analysts providing recommendations for the stock, one suggests a “Strong Buy,” nine rate it as a “Hold,” two give it a “Moderate Sell” rating, and five recommend a “Strong Sell.” However, the stock trades at a premium even to its Street-high target price of $41.00.
AFRM vs. UPST: Which Stock is a Better Buy This September?
While both Affirm and Upstart are likely to benefit from the growing demand for their products and services in the long term, I consider AFRM to be a more attractive stock to buy at its current price. Affirm demonstrated robust performance in its latest quarter, with all key operating metrics experiencing notable improvement. Also, AFRM is projected to experience higher growth rates than UPST in the future. In addition, Affirm looks relatively cheaper from a valuation standpoint. Finally, although both stocks are trading above their average price targets, Affirm remains below the Street-high target, offering a relatively higher margin of safety.
On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
