Better Buy: Upstart Holdings vs. LendingClub
IIt’s no secret that the market has struggled so far in 2022. Year-to-date, the S&P500 fell 19%. This market weakness has been even worse for emerging companies such as financial technology companies, more commonly known as fintechs. For example, the Ark Fintech Innovation ETF has lost more than 55% since the start of the year.
Two fintech companies that exploded back to earth last year are Assets received (NASDAQ: UPST) and loan club (NYSE:LC). After soaring to sky-high valuations, they’re down 87% and 71% respectively from their 2021 peak prices. They look the same on the surface, but one of them has a distinct advantage which I think , will give him an advantage in the future. years.
Upstart and LendingClub have this in common
Upstart is an emerging company fintech who wants to change consumer credit. The company’s goal is to make personal loans available to everyone, including those not considered creditworthy by traditional credit scores.
The company aggregates loans through its website or app, then leverages artificial intelligence (AI) to quantify risk across 1,500 variables to disburse those loans.
LendingClub is a fintech that has been around a bit longer than Upstart. The company was founded in 2006 and was initially a peer-to-peer lending platform. It also relies on AI to help it make loans. Specifically, the company focuses on providing personal loans to people who want to pay off their credit card balances and other debts and consolidate them into one loan.
The only big difference
Upstart and LendingClub have very similar business models. They both focus on writing personal loans and collecting fees for their assistance in writing those loans. However, a key difference is that LendingClub owns a portion of the loans it writes, while Upstart does not.
Upstart’s revenue model is similar to LendingClub’s a few years ago. For the uninitiated, Upstart focuses on underwriting loans on behalf of its banking partners and then receives commissions from those banks, which hold the loans on their balance sheets. These fee revenues accounted for more than 94% of Upstart’s revenue in 2021.
However, what is happening to Upstart today is what happened to LendingClub a few years ago. When credit markets tightened in 2016LendingClub’s heavy reliance on fees caused the company to change its criteria by lowering its standards to continue generating loans – ultimately causing its CEO to resign.
Since then, LendingClub has changed its business by acquiring digital bank Radius Bancorp, which closed in February 2021. Owning a bank gives LendingClub a distinct advantage over Upstart, which I think will give it an edge in years coming.
LendingClub should see more stable revenue
By purchasing Radius Bancorp, LendingClub can now accept deposits and issue loans without going through a partner bank. It also allows the business to hold loans on its books and earn interest income from them over time.
LendingClub CEO Scott Sanborn reiterated that holding loans on its books would sacrifice some profits today, but would be three times more profitable in the long run. LendingClub’s sources of income are therefore more diversified. The fintech generated marketplace revenue (similar to Upstart’s fee revenue) of $180 million in the first quarter. However, this source accounted for 62% of LendingClub’s total revenue, with the rest coming from interest income on the loans it manages.
By holding loans on its books, LendingClub does not rely entirely on lending to drive revenue growth. Instead, the company earns more interest income over time, which is a more stable source of income if personal loan terms tighten. Not only that, but the company has loans on its books when interest rates continue to rise, which should serve as a tailwind for growth in interest income.
LendingClub trades at a cheaper valuation than Upstart, posting a price-to-earnings (P/E) ratio of 13.1 compared to 23.8 for Upstart. Given the cheaper valuation and more resilient business model, I believe LendingClub can outperform Upstart in the years to come.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.