SoFi (NASDAQ:SOFI) stock opened lower by as much as 4% before recovering some losses during intra day trading. The price decline can be attributed to Upstart (NASDAQ:UPST) reporting its preliminary second-quarter earnings. While the two companies both operate in the lending space, they have very different business models.
For example, Upstart claims to use artificial intelligence (AI) to originate loans and partners with banks and unions to increase access to these loans. Meanwhile, SoFi received its bank charter earlier this year, allowing it to lower interest expenses and the cost of funding loan originations. This can help explain why SoFi is only down about a percent while UPST is down about 20%. SoFi also offers its customers a brokerage account to trade stocks and cryptocurrencies, while Upstart does not.
The student loan moratorium expiration date of August 31 is quickly approaching. This is especially important for SoFi, as 29.6% of the company’s first quarter loan origination volume came from student loans. SoFi expects the government to extend this deadline and reflected this in its guidance.
Upstart expects to report a Q2 loss of between $27 million to $31 million. The net loss was lowered from prior guidance of a loss between $4 million and breakeven. From the midpoint values, Upstart lowered its net loss by $27 million. On top of that, the company also lowered its Q2 revenue to $228 million while prior guidance called for revenue between $295 million and $305 million.
SOFI Stock Recovers Some Losses After Upstart Releases Preliminary Earnings
Upstart CEO Dave Girouard explained:
First, our marketplace is funding constrained, largely driven by concerns about the macroeconomy among lenders and capital market participants. Second, in Q2, we took action to convert loans on our balance sheet into cash, which, given the quickly increasing rate environment, negatively impacted our revenue.
Rising interest rates have lowered the demand for loans as customers sit on the sidelines with new purchase ideas. In addition, inflation has scared off consumers too as they deal with necessities like rising gasoline and food prices. On top of that, Upstart likely took losses when it converted some loans into cash.
A multitude of investment firms lowered their UPST rating after the company released preliminary earnings. These include Bank of America, FBN Securities, and JMP Securities. Among them is Morgan Stanley analyst James Faucette, he believes that the bear case for UPST would present a price target of $6.50. He adds that he is “increasingly doubtful” that the company’s AI technology will improve underwriting efficiency.
SOFI stock on the other hand has at least one more potentially positive near-term catalyst in the works: a stock split.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
