Better Fintech Stock: Upstart vs. Affirm

It has been a brutal past few months for fintech stocks, as some leaders in this space have been in free fall. Specifically, two of the most prominent and well-known fintechs -- Upstart Holdings (NASDAQ: UPST) and Affirm Holdings (NASDAQ: AFRM) -- have seen their stock prices fall roughly 36% year to date.

The drops are not really based on business growth -- or lack thereof. In fact, in the most recent quarter, Upstart, which uses artificial intelligence (AI) to process loan requests, grew loan originations by 86%, increased revenue by 64%, and was profitable for the third straight quarter with $18.6 million in net income. Affirm, a buy now, pay later (BNPL) specialist, saw gross merchandise volume increase 36%, revenue spike 30%, and net income rise 61%, year over year.

The issues for both of these stocks are more related to their high valuations, since both are trading at around 58 times earnings. And that's down from December price-to-earnings (P/E) ratios of 168 for Upstart and 107 for Affirm.

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And both are facing concerns about credit quality. With the economy sputtering and the uncertainty of geopolitical tensions, investors are concerned that rising defaults and weakening credit conditions will get worse in 2026. Both fintechs rely on lending to generate revenue, so a drop in loans or a rise in defaults will hurt their bottom lines.

Then again, the dips for both stocks are worth paying attention to because they may provide a buying opportunity. Which of these two fintechs is the better long-term option?

Which stock has more upside?

The fortunes of these stocks should start to improve in the near term as both companies have applied for bank charters. Affirm applied for an industrial loan charter in January, which will allow it to accept deposits and use them to provide its own loans, rather than share its revenue with its third-party bank partners. This would lower funding costs and likely improve earnings.

Upstart also applied for a bank charter to be a full-service national bank. This could really be a game-changer because it would allow it to make its own loans and generate its own interest income.

Currently, Upstart makes the vast majority of its revenue from fees for selling its AI-driven loan processing technology to other banks. It will still do this, but now it will have the added revenue from generating its own loans and interest income.

In the past, federal regulators have been reluctant to grant fintechs bank charters, but that has changed under the Trump administration, so these approvals are likely.

While it could remain choppy for these fintechs this year, given the economy and the market conditions, things should start to shift once the charters are approved and interest rates come down.

Of the two, I think Upstart has more upside with its asset-light AI banking model. While some large banks may develop their own AI models, Upstart has the brand recognition and, more importantly, the more advanced AI data collection and models, making its service a better option for banks than building their own models. Furthermore, with its own asset banking and lending, it might be able to offer better rates than its competitors.

I would rate Upstart as the better long-term investment option with greater scalability and a much broader potential market opportunity.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.