SoFi Technologies' (SOFI 0.12%) recent third-quarter results were strong, beating analysts' expectations and prompting the company to raise its full-year forecast. Its better-than-expected results, especially in today's challenging environment, have put this once-hot stock back on the radar for many investors.
While SoFi could be a good buy over the long run, there's a lot that needs to go right for this young fintech company to pay off as hoped. Investors looking for similar growth opportunities but with more safety should consider buying Ally Financial (ALLY 0.58%) instead. Here's why.
Ally Financial has a track record of growth and positive earnings
Ally and SoFi are both online-only banking companies that offer traditional consumer financial services like checking accounts, savings accounts, credit cards, and loans along with other services. But there are some key differences between the two.
The first is their lending specialties. SoFi focuses on home, personal, and student loans while Ally specializes primarily in vehicle loans. SoFi also offers Galileo payment services, which improve the ease and efficiency of bank-to-bank or business-to-business loans and money transfers.
SoFi is also a younger company. It started in 2010 but didn't go public until 2021. Being the new kid on the fintech block isn't necessarily a bad thing, but it does mean it can take some time to build a track record of profitability that investors can stand behind. Although its roots go back to 1919 as General Motors's dealer finance division, Ally was formally rebranded in 2010 and went public in 2014, giving it a longer track record of growth and profitability.
Since going public last year, SoFi Technologies managed to report positive numbers for its adjusted earnings before taxes, interest, depreciation, and amortization (EBITDA). But on the bottom line, it has yet to turn a profit based on generally accepted accounting principles (GAAP). In Q3 2022, it added 424,000 new accounts and revenue rose by 56%, yet its net loss widened to $74.2 million from $30 million, largely because the company built up its reserves for potential write downs in its credit card division.
On the other hand, Ally's revenue has been increasing steadily since 2014. And the company has maintained positive adjusted earnings per share (EPS) over the past five years for all but one quarter of 2020, which coincided with the onset of the coronavirus pandemic. It also has over 26 times the amount of deposits as SoFi while also carrying a higher deposits-to-liabilities ratio, which indicates Ally has a lower cost structure on its balance sheet and less risk exposure for investors.
Ally Financial offers an attractive price today and a juicy dividend
Aside from Ally being in a much stronger financial position with years of profitability to stand behind, it also trades for a lower price-to-book valuation than SoFi. Its return on equity (ROE), a key measure of bank efficiency, was over 16% during the past year, while SoFi Technologies has produced a negative ROE.
Ally also pays a very attractive dividend yield of roughly 4.7% while SoFi doesn't pay a dividend. Ally's most recent earnings weren't nearly as impressive in some ways as SoFi's in terms of year-over-year growth, but its underlying fundamentals make it the better buy of the two.
SoFi's year-over-year growth is trending positively. If it's able to maintain its momentum in new loan originations and gain customers while maintaining a net interest margin that has averaged a hefty 5.85%, the stock could soar. But in a volatile economic environment, that could prove challenging. Those looking for more of a sure bet should choose Ally Financial.