Financial services stocks have been a hot commodity this year. As measured by the Dow Jones U.S. Financial Services Index, the sector is up about 25% so far through Wednesday’s close, compared to 17% for the S&P 500.
Much of the financial index’s gain can be attributed to traditional banks and financial institutions recovering from the effects of the pandemic in 2020. But for Upstart Holdings (NASDAQ:UPST), SoFi Technologies (NASDAQ:SOFI), and SVB Financial Group (NASDAQ:SIVB), the story isn’t about recovery. It’s about all-out growth as consumers demand a new type of financial service business built for the digital age. Here’s why I’ve been buying (or planning to buy) more of all three this summer.
Upstart: A lending platform that keeps delivering
A lot has been said about Upstart this year. The hot IPO stock that made its public debut just eight months ago is up more than 700% since it first opened trading. The company’s investment thesis revolves around its artificial intelligence (AI) platform, which helps its bank partners make better loans to consumers, a simple enough story that has delivered tremendous results — and could continue to deliver for many more years to come.
During the second quarter of 2021, Upstart obliterated the expectations it provided a few months prior, recording revenue and adjusted EBITDA of $194 million and $59.5 million, respectively. Compared to a year ago, revenue was up 1,018%, and adjusted EBITDA was actually at negative $3.1 million in Q2 2020. Suffice it to say, this business is onto something with its lending metrics for personal and auto loans, and it’s realizing robust profitability even though it’s in the early stages of its growth cycle.
Granted, after the stock popped following the last quarterly report, shares now trade for 35 times trailing 12-month sales. However, that doesn’t tell the whole story. Upstart trades for a more modest 22 times expected 2021 sales after management provided yet another massive upgrade to its outlook. It’s now calling for full-year revenue of about $750 million — $150 million more than before.
Upstart is blazing, and it’s using its position of strength to keep the foot on the gas. It recently announced it’s selling $575 million in convertible debt to add to its cash stockpile (which ended June 2021 at over $506 million). The purpose of the extra cash is listed as “general corporate purposes,” so Upstart could embark on new product development, more marketing, or perhaps an acquisition or two to jump-start this upstart’s entry into new areas of the fintech world. Either way, I plan to continue accumulating shares after the latest update.