Last year, financial technology, or fintech, stocks were all the rage. Many fintech companies saw their stocks shoot up and reach astronomical valuations. But this year, as interest rates have surged, investors have gotten a lot more selective about these stocks. In fact, the market this year has been brutal for most fintech stocks.
Two popular ones that fall into this category are digital-bank SoFi (SOFI 0.98%) and buy now, pay later (BNPL) company Affirm (AFRM 2.31%). SoFi's stock is down more than 64% this year, while Affirm's stock is down more than 78% during the same time period. These declines create a potentially interesting entry point. Let's take a look at which is the better long-term buy.
SoFi: One-stop shop for financial services
SoFi is a digital bank that seeks to provide all financial services for high-income earners, typically those who make more than $100,000 per year. Most consumers get financial products from at least several different banks, but SoFi wants to be the one-stop shop and meet all of the financial needs of its target-customer base.
The company offers checking and savings accounts, online-investing capabilities, credit cards, mortgages, personal loans, student loan refinancing, and personal finance tools. SoFi also has several tech banking businesses that are really B2B businesses but could be an attractive and diverse source of revenue over time. Earlier this year, SoFi secured a bank charter through the acquisition of a tiny California bank, which now enables it to hold deposits and use those to fund a chunk of its loans.
NASDAQ: SOFI
Key Data Points
SoFi has done a nice job of drawing in new members and bringing them onto its flywheel, which is a key strategic priority to increase cross-selling and lower customer-acquisition costs. In the second quarter, SoFi generated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $20 million on adjusted revenue of $356 million.
The bank is also expected to benefit from the expiration of the student loan moratorium at the end of the year and with President Joe Biden's plans to forgive $10,000 of student debt for certain borrowers.
With the moratorium in place for more than two years, borrowers haven't had to make payments on their federal student loans, which naturally depressed refinancing activity. Borrowers have also been putting off refinancing on expectations that some kind of relief could be coming, so borrowers now have the clarity they need to decide on whether to refinance. Student loan refinancing, which used to be SoFi's largest product before the pandemic, has been operating at about half capacity or less since the moratorium went into place.
Despite the success SoFi has had, I'd like to see the company reduce its high levels of stock-based compensation and start to narrow the loss in its financial services division, which includes checking and savings accounts and its online investing brokerage. The financial services division is one of the main ways SoFi draws customers in, but customer-acquisition costs start to look uneconomical if SoFi can't show a path to profitability in this division.
Affirm: BNPL mania
Started by former PayPal co-founder Max Levchin, Affirm has brought BNPL to the masses in a big way. BNPL allows people to buy goods with no money down, then repay on an installment schedule.
Affirm allows people to do this with a variety of products including interest-bearing BNPL loans and short- and long-term duration BNPL loans, as well. The company is also preparing to roll out its Affirm+ debit card, which has BNPL optionality.
The opportunity that Affirm has is huge. The company has signed several big partnerships with businesses like Walmart, Amazon, Shopify, and eBay. Affirm's partners in total address roughly 60% of all e-commerce sales in the U.S. Additionally, the North American e-commerce market was valued at $900 billion in 2021, and BNPL sales only represented $34 billion of that total addressable market.
NASDAQ: AFRM
Key Data Points
In fiscal 2022, which ended June 30, Affirm's gross merchandise volume (GMV) through its platform reach $15.5 billion, up from $8.3 billion in fiscal 2021. The company is forecasting between $20.5 billion and $22 billion of GMV in fiscal 2023.
I think one of the big things casting doubt on Affirm's business is credit quality. BNPL products are effectively short-term loans, and there have been a lot of reports regarding BNPL borrowers making late payments. Furthermore, Affirm saw delinquencies rise in July and August and charge-offs -- which is debt unlikely to be collected and a good indicator of actual losses -- jumped in Affirm's most recent quarter, as well.
This has partially been expected as credit conditions normalize amid higher interest rates, but I'm sure investors are wondering how credit will continue to trend if the U.S. economy tips into a more severe recession.
Which is the better buy?
While Affirm is certainly the bigger potential opportunity, SoFi is the better buy. SoFi is generating strong growth, and I believe it will be much better insulated in a severe recession.
The company caters to very strong borrowers with high credit scores and high annual incomes. Furthermore, being able to gather deposits and hold them at the bank gives SoFi a very stable source of funding and a much better framework for holding loans on its balance sheet.
There's a lot about Affirm that I just don't understand, such as credit quality. This makes me very uncertain about the company right now.
