Watch Out Start: Visa partners with competitor Pagaya
Lending platform based on artificial intelligence Upstarts (NASDAQ: UPST) the stock attracted a lot of attention in the market last year, with its price catapulting nearly 700% by the end of October. The stock was caught in the year-end tech stock selloff and ended the year with a 270% gain.
The market in general is seeing a transition from popular tech stocks to more traditional value stocks, such as Visa (NYSE:V). The financial services giant made a big comeback last year after suffering pandemic-related headwinds, and its stock ended the year flat.
Events so far in 2022 indicate a slight reversal in performance for these two companies. Visa stock is already up about 7.5% in 2022, while Upstart stock is down 27.3%. Visa last week announced its partnership with Tel Aviv-based Upstart competitor Pagaya. What does this deal bring to Visa and what could it mean for Upstart?
Better access equals more revenue
Much of Visa’s stock price gains in 2022 can be attributed to the release of strong first quarter fiscal 2022 results last week (for the period ended Dec. 31). Net revenue increased 24% year over year to more than $7 billion, and net income increased 27% to $4 billion. Visa is the largest credit card processing company in the world, but it does more than process credit card transactions.
Visa also works with its merchant partners and provides many fintech solutions to help them grow their business. These include smart cards for contactless payments and ‘buy now, pay later’ tiered payment plans such as those offered by companies such as Affirm Assets. Visa often works with smaller fintech companies, either by acquiring them or by partnering up, to offer many of its services.
Last week, he announced a partnership with Pagaya. Pagaya is an artificial intelligence-based credit reporting company that seeks to better identify a consumer’s credit risk, enabling larger loan approvals without more risk to the lender. It is a service very similar to Upstart. While Upstart focuses on personal and auto loans, Pagaya has entered broader ground, including credit cards, insurance, and mortgages. The other major difference between the two companies is that after working with lenders to expand access, Pagaya sells approved loans to large institutional investors.
The Visa partnership is great news for Pagaya as it expands Pagaya’s existing network. The wider customer base is expected to add a huge amount of data into Pagaya’s analytics algorithms, making it an even better product. This should also give Visa a boost. Visa management said, “Through our partnership with Pagaya, we are providing our issuing bank customers and co-branded partners with next-generation technology to expand their customer base, increase conversion rates, increase the power of purchase and thus increase their income”.
Pagaya has entered into an ad hoc acquisition company (SPAC) partnership with EFJ acquisitionwhich should make Pagaya public in early 2022.
Where does that leave Upstart?
Investors have been excited about Upstart’s proprietary technology and the opportunities it offers, but it’s clear that Upstart isn’t the only game in town. Pagaya is smaller than Upstart, with $137 million in Q3 revenue compared to Upstart’s $228 million. With an estimate of over $5 trillion in its addressable market (TAM), Upstart has plenty of room to grow. This news should therefore not affect Upstart or its investors too much. Rather, it highlights potential additional uses of Upstart’s services. Pagaya estimates its addressable credit card market at $183 billion, and Upstart does not include this market in its TAM estimates.
The data suggests that Pagaya is ahead of Upstart in credit cards, which could give it a long-term advantage.
Upstart and Pagaya seem like big companies with huge prospects. Upstart shares have soared so far this year, but are now trading at 96 times trailing 12-month earnings, a huge discount from 2021. The stock price still isn’t cheap, but the growth potential is enormous. At the same time, I would keep an eye out for when Pagaya hits the markets, as it could prove to be a great investment. And as always, Visa is one of the best value stocks out there, and if you don’t already own it, consider adding it to your portfolio.
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