Better Stock to Buy: Upstart vs. Pagaya

Upstart Holdings (UPST -4.35%) and Pagaya Technologies (PGY -2.65%) offer similar consumer credit evaluation products, using artificial intelligence (AI) to assess credit risk faster and with more accuracy than the traditional credit scoring model. They both released excellent earnings reports last week, and their stocks jumped accordingly. Let’s compare them both and see which one is the better buy today.

Upstart: Demonstrated track record

Upstart stock became a market favorite early on, soaring to highs quickly after becoming a public company before crashing when growth began to slow down. It was in a funk for several years, but business is moving in a positive direction, and investors are getting excited about it again.

There was excellent progress in the 2024 fourth quarter. Revenue increased 56% year over year to $219 million, and transaction volume was up 68% to $2.1 billion. The net loss was only $2.8 million, an improvement from $42.4 million the year before, and Chief Executive Officer Dave Girouard said he expects to at least break even in 2025.

There was good reason to get excited about Upstart when it first went public in late 2020. With low interest rates, it was able to approve more loans, generating more business and reporting healthy profits. If it can get there again, the stock could reward investors again, too.

There’s no going back from the AI-driven platform. Although bank partners have been cautious about moving over to newer platforms, they’re exploding all over the place, and like with many other industries, it’s only a matter of time before AI becomes the normal way to approve loans. Ninety-one percent of Upstart’s loans are fully automated, and 93% of those loans are instantly funded. Upstart has $1.3 billion in new funding commitments for these loans, which is an important piece in making the model work.

Pagaya: Holding up under pressure

Pagaya became public when Upstart was already floundering, and it’s performed well throughout its time on the markets. Network volume was $2.6 billion in the fourth quarter, only a 9% increase year over year, but it has increased annually without declines. Revenue increased 28% to $279 million, slightly ahead of Upstart’s numbers. Net loss, however, was $238 million in the quarter, which management attributed to stock-based compensation and fair-value adjustments. It’s forecasting a net loss of between $20 million and breakeven for the 2025 first quarter, with net profit in the second quarter.

Pagaya has fewer lending partners than Upstart, only 31 compared to mote than 100, but some of them are high-profile clients like U.S. Bank and SoFi Technologies, and it draws more business from fewer clients.

One of Pagaya’s strengths is in its funding. It drew $6 billion in upfront funding commitments in 2024 for the loans it approves, with 130 different funding partners, and it was the top issuer of asset-backed securities (ABSs) for personal loans in the U.S.

Which stock is the better buy today?

These are both risky stocks, but in different ways. Upstart has been profitable before, which can inspire confidence that it can do it again, but it was seemingly unprepared for the high interest rate environment starting in 2021. Many financial stocks are cyclical, but established financial stocks don’t decline as severely as Upstart did when the climate went sour, and they don’t fall into net losses for years. Upstart might be in a better place right now, and it has more data to be better prepared for the next time the economy is not in its favor. But that implies risk. On top of that, its stock has moved dramatically, both up and down, during the past few years. It hasn’t been a ride for the faint of heart.

Pagaya’s risk is in being more of an unknown. It has performed extremely well under challenging conditions, managing risk more effectively — which is the meat and potatoes of this business. That inspires confidence that it can manage through generally adverse circumstances, which is critical in a stock you can count on. However, it’s only recently turned a profit. It also has a complex structure that doesn’t lend itself toward transparency, and it made an eyebrow-raising move with its stock issuance last summer. There’s a lot of “high finance” here that makes it more opaque.

Let’s move on to valuation.

PGY PS Ratio data by YCharts

Pagaya is a lot cheaper on all counts, and it’s objectively incredibly cheap. That’s how risky the market sees it today, despite its strong performance and near profitability.

I wouldn’t recommend taking a large position in either of these stocks, because they’re both risky. If you have a big appetite for risk, you might see Pagaya as the better buy today. It’s cheaper and doing better. If your risk level is notch lower, and you prefer a stock with a longer track record that doesn’t seem as complex, you might want to invest in Upstart.