Financial technology companies, more commonly known as fintechs, have been hit hard by this bear market for tech stocks, with the Nasdaq Composite index down almost 25% year to date. Two of the hardest-hit consumer finance companies are SoFi Technologies (SOFI -4.03%) and LendingTree (TREE -3.43%).
While there are key differences between the two fintechs, one thing they have in common is that their stock prices are each down more than 50% year to date. Are these two stocks victims of the market and the economy, or are there bigger issues at play? If you were considering these two stocks, which is the better buy right now?
Birds of a feather?
SoFi and LendingTree are both online lenders but, as mentioned, they have dissimilar business models. Let's start with LendingTree. It is not a bank; rather it is an online marketplace for mortgages and other types of loans. Consumers use the website to make a loan request and then LendingTree sends it out to lenders on its network who essentially compete for the business. The consumer then gets loan offers in short order and can choose the one with the best rates or features.
The platform is free to use for consumers, but LendingTree makes money from its network of lenders. It earns a match fee from every lender that it matches a loan request with. It also earns a commission from the lender that closes the deal or sells its service to the consumer.
SoFi started out as a student loan lender, but it has added to that business over the years. In the first quarter of this year, it got a bank charter after acquiring Golden Pacific Bancorp, so it has traditional digital banking services -- loans and deposits -- as well as investments, an online brokerage, and financial planning services for individuals and small businesses. But there is a second major piece to SoFi that sets it apart from its competitors -- its technology platform.
SoFi offers banking-as-a-service (BaaS), providing the technology platform to help other companies build out their own digital banking businesses. This business has been growing rapidly since SoFi acquired Galileo Financial Technologies in 2020.
How's it growing?
Both of these companies had net losses in the first quarter. LendingTree had a net loss of $10.8 million in the quarter, down from $19 million in net income in the first quarter of 2021. While revenue was up 4% year over year to $283 million, higher expenses on marketing and product development led to a net loss, although LendingTree exceeded revenue estimates.
One good sign for LendingTree is that its diversification beyond mortgages has helped boost revenue. In the quarter, mortgage revenue was down 20% to $102 million while consumer loans were up 75% year over year to $101 million. The outlook for the full year calls for $1.1 billion to $1.2 billion in revenue, a 5% to 8% increase over 2021.
SoFi, which went public just last year, had a net loss of $110 million, down from a net loss of $177 million a year ago, but revenue was up 69% year over year. Revenue beat analysts' estimates and losses weren't as bad as expected.
While expenses remain high, SoFi continues to grow its membership and users. It added 408,000 new members in Q1, the third-highest total ever, bringing its total of members to 3.9 million, up 70% year over year. The company had the second-best quarter for product growth, meaning members who used their products. Product growth was up 689,000 to 5.9 million, an 86% increase from the previous year. And the technology platform reported growth as well, with the number of accounts enabled jumping to 110 million at quarter's end, up from 70 million one year ago and 100 million the previous quarter.
Which is the better buy?
Both of these firms, as lenders, will thrive in a strong economy with rising interest rates. We only have half of that equation right now, rising interest rates, with the economy on the brink of recession. While both companies project revenue growth this year, the economic situation is fluid right now.
Both of their valuations have come way down during this bear market, but as young, growing companies in a crowded field of more established, stable players, there is too much uncertainty right now to warrant a buy for either.
I particularly like SoFi's long-term potential, with its dual revenue streams as a bank and BaaS provider, but I'd wait another quarter or two to see how things shake out with inflation, interest rates, as well as geopolitical and macroeconomic issues before investing in either SoFi or LendingTree. They're probably not going anywhere anytime soon, so you have a few more quarters to get a better view.