Why is Upstart (UPST) stock and SOFI stock collapsing? I just made a video, LINK, if you'd like an overview of the situation.
Both of these companies are referred to as a "Fintech" businesses that take the latest in machine learning technology to disrupt traditional financial markets.
For context, the loan markets that Upstart and SOFI are attempting to disrupt are HUGE. If either UPST or SOFI are successful it could potentially translate into hundreds or even thousands of percent growth in the future.
In addition to their core lending products, SOFI is attempting to become an EVERYTHING financial services company (e.g. infrastructure, trading platform, asset management, etc.) however they're still immensely UNPROFITABLE.
In contrast, UPST is more narrowly focused on the huge market opportunity of disrupting loan originations and is also much more PROFITABLE.
The challenge that both UPST and SOFI currently face is that they are both primarily loan "origination" businesses and when interest rates move higher or the economy gets worse, who will want to BUY their personal loans? With fewer eager buyers, Upstart is forced to hold onto their originations and their loan portfolio increased by several hundred million during the 1Q 2022.
Similarly, while Upstart's loan delinquencies significantly OUTPERFORMED their own forecasts largely because of government stimulus spending, could their models similarly UNDERPERFORM in the quarters ahead if economic conditions are materially worse than they expect leading to huge write-offs?
Owning UPST or SOFI is too hard for me right now, but IF they both survive and thrive through this full CREDIT cycle, their opportunity for continued disruption is ENORMOUS.
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