Two fintech stocks that have captivated investors this year are SoFi Technologies (SOFI +2.05%) and Nu Holdings (NU 0.21%), the parent of Nubank. Both offer a suite of banking products, seeking to become the center for all of their customers' banking needs. While SoFi is based in the U.S., Nu is disrupting the Brazilian and Latin American banking markets by offering customers easier access to financial services with greatly reduced fees compared to competitors. Let's take a look at which one could be the better buy right now.
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SoFi: An attractive flywheel strategy
SoFi's thesis is that high-income Americans are poorly served by their banks, and that they use too many different providers for services and products they should be getting in one place. SoFi seeks to be that one provider.
The company draws customers into its ecosystem largely through a credit card, cash management, or investing account, and then seeks to sell them other, more profitable products -- including personal loans, student loans, and mortgages. In selling multiple products to members, SoFi cuts down on customer acquisition costs and generates more business momentum as users add more services, a classic flywheel effect.
For instance, if a member at SoFi just uses a cash management account, the five-year variable profit on that account is expected to be $85. Then if another member just gets a personal loan, the variable profit on that customer using that profit over one year is $938. Put the two together and there is a combined variable profit of $1,023. But if SoFi can get one of its members to purchase both a cash management account and a personal loan, the variable profit on that member rises to $1,848.
SoFi now has nearly 3 million members. It's expected to finish the year with more than $1 billion in revenue and then grow that to about $1.5 billion in 2022. The company is still not profitable or expected to be profitable next year, although this could change if SoFi is able to close on its previously announced acquisition of Golden Pacific Bancorp and the accompanying bank charter. And last year it purchased another fintech called Galileo, which helps other companies create and manage digital payment and banking features.
Nubank: A market opportunity of epic proportions
Nubank is similar to SoFi in that it's a digital banking platform offering customers credit cards, cash management accounts, personal loans, and investing and payments capabilities. Nubank also serves more than 1 million small and medium-sized business banking customers.
What's different about Nubank -- and offers more potential than just about any fintech opportunity in the world -- is the size and makeup of its market. Because of the high fees and complexity that go along with accessing traditional banks in Brazil and many other parts of Latin America, Nubank has had tremendous appeal in the region. The platform has provided millions of users with their first credit card or bank account. In total, including business customers, Nubank has amassed an astounding 48 million customers. And there is plenty of opportunity remaining: Nubank said in its registration statement that at the end of 2020, there were 652 million people in Latin America and a gross domestic product of $4.5 trillion.
Nubank's acquisition costs per customer come to about $5, which is the lowest customer acquisition cost I've seen among fintech companies I've covered. Customers also seem very happy with Nubank, giving it a Net Promoter Score (NPS) of 90 or above, depending on the country (NPS is a measure of how likely customers are to recommend Nubank to a friend).
Based on the first three quarters of the year, Nubank should make around $1.4 billion in revenue in 2021, and it has reported close to a $100 million loss through the first three quarters of the year.
Which is the better buy?
Nubank certainly presents the bigger opportunity, but it's already attained a massive valuation: At Monday's prices, its market cap was roughly $41 billion. That means it trades at roughly 29 times this year's projected revenue. Certainly, I can understand the opportunity, but I still see several challenges associated with Nubank. For one, despite its massive customer base, the monthly average revenue per customer was just over $4 for the first nine months of 2021. Second, Brazil often must deal with difficult economic conditions, including high inflation. Additionally, Brazil's central bank just cut its GDP growth for 2022 to 1%. Banking is heavily linked to the economy, so no matter how good the business is, it can be tough in a struggling or volatile economy with high inflation and little growth. Finally, with so much opportunity in the region, I suspect more competition will emerge to challenge Nubank.
SoFi, on the other hand, doesn't have nearly the same opportunity but is already executing in a competitive banking landscape, and its business model is capable of generating higher margins right now. Also, the bank charter will help make SoFi's model more stable with access to deposits insured by the Federal Deposit Insurance Corporation, the ability to originate loans inside the company, and a better model for holding loans on the balance sheet. Galileo is another exciting feature that Nubank doesn't have.
I don't doubt that the reward could be higher with Nubank, but it's very hard for me to put an appropriate valuation on it right now. And when you look at Brazil's economy and price action in stocks like StoneCo -- a Brazilian payments company that also has big potential but has seen its stock fall nearly 82% this year -- I think there is going to be volatility and the opportunity to get in Nubank at a lower valuation. SoFi stock has been volatile, but the path is clearer to me at this point, which is why I view it as the better buy.
