EEven if you’re new to fintech, you’ve probably heard the buzz around consumer finance innovators. SoFi Technologies (NASDAQ: SOFI), Holdings reached (NASDAQ: UPST), and Loan Club (NYSE: LC). SoFi, which went public through a merger with a special purpose acquisition company this year, offers the widest range of financial products and services of these three. Upstart went public at the end of 2020 and has seen its shares climb more than 700% since its first day of listing. LendingClub, which has been public since 2014, is more or less the underdog here, with its stock falling below $ 5 last summer but recovering quickly after the company made a key acquisition this year.

There has been a lot of debate about which of the three is the top company and the best investment opportunity, so let’s take a look.

Compare business models

All three of these companies have disruptive business models, using technology and artificial intelligence to acquire customers more easily than traditional banks and approve loans faster.

SoFi has three main activities. Its loan segment offers student loan refinances, school loans, personal loans and mortgages. He also owns a financial services business that offers credit cards, cash management accounts, and a brokerage service for members to invest in stocks and cryptocurrencies, as well as other products. Finally, in 2020, SoFi acquired Galileo, a platform that helps other fintechs perform front-end and back-end functions such as account setup, account funding, and direct deposit. She is also in the process of acquiring a bank – this is important because a banking charter will allow her to collect deposits, which will help her finance loans at lower cost and reduce other expenses in the process of setting up loans. ready. SoFi’s strategy is to become a one-stop-shop for consumers. By forcing them to buy multiple financial products, SoFi can dramatically reduce customer acquisition costs and increase profitability. SoFi already has more than 2.5 million members.

Upstart creates personal loans and unsecured auto loans by leveraging AI to determine actual borrower risk and make lending decisions faster. In 2020, 21% of the loans financed by Upstart were retained by the original banks and 77% of the loans were purchased by institutional investors.

LendingClub also leverages AI and data to create unsecured personal loans. He also wants to get more into auto lending and create a world-class checking account for his clients that will reward them for making loan repayments. It is the only one of these three companies to currently have a banking charter. Earlier this year, LendingClub completed the acquisition of Radius Bank. As a result, it reduced financing costs and expenses by using cheap deposits to fund its loans and no longer having to rely on third-party banks to create all of its loans. LendingClub not only sells loans to banks and investors, it also plans to keep 15% to 25% of the amounts on its balance sheet and collect recurring monthly loan payments. The company has 3.5 million members.

Image source: Getty Images.

Second Quarter Results and Forecasts

All eyes were on these three companies as they released their second quarter results and updated their forecasts for the remainder of the year. Here’s what each one reported:

Source: SoFi financial statements

SoFi’s second quarter results disappointed investors as the loss reported by the company far exceeded analysts’ consensus estimate. However, $ 144 million of the company’s $ 165 million loss was due to non-cash and one-time expenses. Membership growth slowed slightly during the quarter as Galileo continued to add new accounts and SoFi Invest significantly increased revenue. The company has also cut revenue guidance from its student loan refinancing business due to the unexpected extension of a federal moratorium on student loan repayments and less revenue on Galileo than expected.

Source: Upstart Financial Statements

In numbers, Upstart had the group’s most successful second quarter, generating nearly $ 0.40 per share in profit, beating expectations and increasing its guidance for the year by $ 600 million in revenue to $ 750 million. dollars. Investors rewarded the company, sending shares 56% higher since reporting earnings.

Source: LendingClub financial statements

LendingClub completely exceeded analysts’ expectations and management’s own guidance in the second quarter, making a profit several quarters ahead of Street expected, and demonstrating that its concept of a digital market bank that combines the recording of loans on the balance sheet and their sale. to banks and investors works better. provided that. Since LendingClub reported profits on July 28, its stock has climbed more than 70%. Management has also revised its annual forecast upward, now forecasting start-ups between $ 9.8 billion and $ 10.2 billion, revenue of $ 750 million to $ 780 million, and a full-year loss of $ 13 million to $ 3 million. . The original and revenue forecast has now tripled since the start of the year, while the loss estimate has risen from a loss of $ 140 million to $ 159 million earlier this year.

What is the best investment opportunity?

If you look at my disclosure below, you’ll see that I’ve already put my investment dollars into one of these fintechs. I think LendingClub is the best investment opportunity out of the three, and I’ve been buying stocks and call options since March. Indeed, the acquisition of Radius and its banking charter has been so transformational for the company and in such an accelerated time frame.

LendingClub CEO Scott Sanborn said holding loans on the balance sheet will ultimately be three times more profitable than selling them to investors. Additionally, Sanborn said obtaining a banking charter has been pivotal for the market platform as banks and investors now know LendingClub is subject to the same regulatory standards as them and now takes the risk. credit itself by holding a portion of the loans, which creates more confidence. Being able to hold loans on the balance sheet also gives LendingClub pricing power in the market, because if investors and banks are unwilling to pay certain fees for the loan, LendingClub can simply put it on its balance sheet. And by retaining only 15-25%, LendingClub can withhold loans from better quality borrowers.

I think SoFi and Upstart are strong companies, but as Upstart has started to tap into the automotive market and SoFi has a lot of products, LendingClub has managed to catch up quickly only because of its expertise in unsecured personal loans. . Soon the company will enter the automotive space and is in the process of setting up a checking account to roll out to its 3.5 million members. I find it interesting that SoFi talks about the potential to generate better margins by selling multiple products to its members. While this is undoubtedly true, LendingClub in the second quarter generated significant operating leverage (revenue growth rate minus expense growth rate) without doing anything cross-selling. And for how much Upstart talks about its AI capabilities – the company says it uses 15 billion cells of data to inform its algorithmic models – LendingClub says it uses more (148 billion cells).

Whichever company is the best – and I’m sure there is a good debate to be had here – there is clearly a valuation gap. LendingClub has a market cap of $ 2.6 billion at Wednesday’s prices, SoFi has a market cap of $ 11.4 billion, and Upstart has a market cap of $ 16.5 billion. SoFi expects more revenue for the full year and Upstart expects to generate a higher profit, but remember Q2 was really the full first quarter where LendingClub had its new digital market concept intact. The company is still only trading at 3.5 times the estimated full-year turnover. I suspect the market is tough for LendingClub due to past controversies within the company, so I think if the company can deliver a few quarters of more consistent earnings, the market will reward the stock more. If you believe in the valuation of SoFi and Upstart, then LendingClub should always seem undervalued, given the numbers the company just released and is planning for the future.

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Bram Berkowitz owns shares of LendingClub and has the following options: $ 30 long calls in October 2021 on LendingClub. The Motley Fool owns stock and recommends SoFi Technologies, Inc. and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.