Better Growth Stock: Upstart vs. Nu Holdings

Upstart Holdings (NASDAQ: UPST) and Nu Holdings (NYSE: NU) are both innovative fintech companies that are shaking up traditional financial institutions.

Upstart uses AI to analyze non-traditional data points (like GPAs, standardized test scores, and previous jobs) to approve a wider range of loans than systems that only review an applicant's FICO Score and annual income. That helps its lending partners serve more people with limited employment or credit histories.

Nu, more commonly known as NuBank, is the largest digital bank in Latin America. Most of its customers are in Brazil, Mexico, and Colombia, and its digital-only approach and no-fee credit cards enabled it to expand much faster than its regional brick-and-mortar competitors.

Both stocks have generated market-beating gains since their IPOs. Upstart went public at $20 per share in December 2020, and its stock now trades in the low $50s. Nu went public at $9 per share in December 2021, and it now trades at about $16. But which is the better growth play today?

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Upstart's next growth cycle is starting

Upstart doesn't provide any loans on its own. Instead, it acts as an AI-powered middleman that approves loans for its lending partners like banks, credit unions, and auto dealerships. It generates most of its revenue by taking a cut of each approved loan as its referral fee.

Upstart's business thrives when interest rates are low. That's why its revenue surged 42% in 2020 and 264% in 2021 as its number of originated loans skyrocketed. But as interest rates spiked, its revenue dropped 1% in 2022 and plummeted 39% in 2023.

When interest rates are high, consumers generally take out fewer loans. Upstart's lending partners also cautiously served up fewer loans on its marketplace as the macro headwinds intensified. But even as Upstart's core business stalled out, its contribution margin (the percentage of its fees it retains as revenue) rose from 50% in 2021 to 63% in 2023. That expansion was driven by its automation of more loans and a higher mix of high-value "super prime" borrowers.

In 2024, Upstart's revenue rose 24% as the Federal Reserve slashed its benchmark interest rates. Its contribution margin dipped to 60% as it served a broader range of borrowers again, but its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive again for the full year.

From 2024 to 2027, analysts expect its revenue and adjusted EBITDA to grow at a CAGR of 36% and 245%, respectively, as interest rates drop even further. It's also expected to turn profitable on a generally accepted accounting principles (GAAP) basis in 2025. With an enterprise value of $5.9 billion, its stock still looks undervalued at 17 times next year's adjusted EBITDA.

But Nu faces a near-term slowdown

From 2021 to 2024, Nu's number of year-end customers more than doubled from 53.9 million to 114.2 million. Its activity rate (its active customers divided by total customers) rose from 76% to 83% as its average revenue per customer (ARPAC) soared from $4.50 to $11.10. Even as it expanded, its average cost for serving each active customer held steady at $0.80 per month.

As Nu gained more customers across its core markets, it expanded its ecosystem with more credit cards, lending services, e-commerce services, and cryptocurrency trading tools. Those new features helped it squeeze more revenue from its existing customers to offset the costs of that expansion.

Nu's revenue grew at a stunning CAGR of 89% from 2021 to 2024. It also turned profitable on a GAAP basis in 2023, and its earnings per share (EPS) nearly doubled in 2024.

Those explosive growth rates made Nu one of the world's fastest growing fintech companies -- but its growth is gradually slowing down as it saturates the Brazilian market (where it serves about 60% of the adult population), faces tough competitors like MercadoLibre, and navigates the volatile macro headwinds across Latin America.

To offset that pressure, Nu is scaling up its business in Mexico and Colombia (where it only serves 13% and 10% of the adult populations, respectively) and expanding into the U.S. market. However, those plans will compress its margins and throttle its near-term earnings growth.

Nevertheless, analysts expect Nu's revenue and EPS to grow at a CAGR of 28% and 38%, respectively, from 2024 to 2027 as it leverages its scale to overcome those micro and macro challenges. Those are stellar growth rates for a stock which trades at 20 times next year's earnings -- but it could stay in the penalty box as long its growth is slowing and its expenses are rising.

The better growth play: Upstart

Upstart and Nu both have plenty of upside potential. However, Upstart's stronger growth, its direct exposure to the interest rate cuts in the U.S., and its low valuation make it a more attractive growth stock than Nu. Nu runs a tight ship, but it needs to balance out its growth and investments over the next few quarters before the bulls come back.

Leo Sun has positions in MercadoLibre. The Motley Fool has positions in and recommends MercadoLibre and Upstart. The Motley Fool recommends Fair Isaac and Nu Holdings. The Motley Fool has a disclosure policy.