SoFi and LendingClub (LC) are two fintechs that have been making lots of headlines lately. SoFi is going public through Chamath Palihapitiya's blank-check company Social Capital Hedosophia Holdings Corp. V (IPOE). LendingClub, which went public in 2014, recently completed its acquisition of Boston-based Radius Bank, which marks a second chance for the once-beleaguered company.
Given the fact that both SoFi and LendingClub are heavily involved in consumer lending and both have either secured or will soon have a bank charter, the two offer an interesting comparison. Let's look at which one presents the better investment opportunity right now.
Projections at SoFi
SoFi offers student, personal, and home loans. The company also has an online brokerage and other financial services such as cash management. Last year, SoFi purchased the fintech Galileo, a platform that helps other fintechs carry out front- and back-end functions such as account setup, account funding, direct deposit, authorizations and processing, and more. Galileo also manages card programs for enterprise partners. All of these activities generate a solid stream of fee income.
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With its recent purchase of Golden Pacific Bancorp, SoFi should have its bank charter later this year. A bank charter is a big deal because it will allow SoFi to gather and hold cheap deposits on its balance sheet to fund its lending operations.
SoFi has set some pretty intriguing revenue projections. After generating net adjusted revenue of $621 million in 2020, the company expects to generate $1.5 billion of net adjusted revenue in 2022 and nearly $3.7 billion in 2025. SoFi also expects to grow membership from roughly 1.7 million to 3 million by the end of 2021.
At first glance, that might seem lofty, but SoFi's membership grew from 976,000 at the end of 2019 to roughly 1.7 million at the end of 2020, and growth has been accelerating in recent quarters. SoFi expects to be profitable starting in 2023 and generate more than $630 million in net income by 2025.
Projections at LendingClub
LendingClub, which launched in 2006, is mostly in the business of providing personal loans for consumers looking to refinance their credit card and auto loans or make major purchases. The company completed its acquisition of the branchless Radius Bank earlier this year and therefore has secured a bank charter.
Revenue projections are a little bit murkier at LendingClub because the company just completed its acquisition of Radius and is not providing a ton of guidance past 2021 right now. But the Street is forecasting revenue of about $765 million in 2022 and expects LendingClub to turn a profit of $0.33 per share in 2022. If multiplied by the company's current 91.9 million weighted-average diluted shares (common and preferred), that would equate to about a $30 million profit in 2022 (but the share count could change).
LendingClub's membership growth is also a little bit harder to gauge. The company says it has 3 million members, and CEO Scott Sanborn made these comments in 2019:
"Every day 40,000 people ... come to us looking to improve their financial health. ... It took us eight years to reach our first million borrowers, two years to reach our second million and little more than a year to reach our third million."
That said, the company continues to say it has 3 million members, meaning it likely hasn't had as much growth recently as SoFi. This would not necessarily surprise me considering LendingClub has had to focus on so many other parts of its business in 2020. I expect healthy growth will return soon.
My pick
At their current levels, I think both SoFi and LendingClub are good investments, and I currently have some kind of long position in each one of them. They both have shown a clear ability to attract consumers and a clear path to growing revenue and profitability. Additionally, the fact that LendingClub has a bank charter and that SoFi should have one later this year really makes each of their business models much stronger.
While it's close and neither is a bad investment, I am going to choose SoFi right now as the better investment because of its revenue diversity. While SoFi is very reliant on lending right now, by 2025 the company expects to reduce that reliance and generate more-even streams of revenue from lending; from financial services, such as its online brokerage; and from Galileo, which seems really special. The platform was projected to bring in more than $100 million in revenue in 2020, a number the company expects to rise to more than $900 million by 2025.
LendingClub right now is heavily dependent on lending, which can be a business sensitive to interest rates and downturns. For instance, in 2020 during the pandemic, LendingClub saw its total originations in 2020 drop nearly 65% from 2019. Now, the pandemic is hopefully a once-in-a-lifetime event, and the company was also in the process of transitioning, but major events that impact the economy and loan activity seem to happen once a decade. These events can significantly dry up loan activity, hurting most companies overly reliant on lending.
Additionally, SoFi originates home mortgages, which can act as a natural hedge when interest rates drop as they did in 2020. That's why the company managed to grow loan originations in the first nine months of 2020 compared to the same time period in 2019. While volumes of personal and student loans declined during that period, home-loan originations jumped by 245%.
I think LendingClub will undoubtedly diversify its revenue and offer more products to its current members. I see opportunities for fee income, and I'm sure the company could get into the mortgage business if it really wanted to as well (it already has the machine built). But I only know what I know right now, and SoFi is already well-positioned and has a strong long-term plan.
