The financial super app SoFi Technologies (SOFI -0.42%) and the Brazilian digital bank Nu Holdings (NU -1.21%) have been two of the most highly anticipated and most-watched fintech companies to hit the public markets in recent years.
Both initially saw fast growth in their respective markets. And both are navigating choppy markets this year after their valuations shot up in 2021 and as investors focused more on a viable path to profitability.
Next year is clouded with uncertainty, and who knows what market conditions will be like, but let's take a look at which of these high-profile fintech companies will be a better buy in 2023.
SoFi: A one-stop shop
After going public through a special purpose acquisition company (SPAC) in 2021, SoFi rose to a huge valuation like many tech stocks before falling more than 70% this year amid high inflation and rising interest rates.
The company seeks to serve all the financial needs of high-income earners. Currently, SoFi offers bank accounts, online investing capabilities (including crypto), credit cards, personal finance management tools, and a variety of lending products including mortgage, student loan refinancing, and personal loans.
For the last few years, SoFi has been dogged by the student loan moratorium, which really cut into its student loan business, formerly its largest lending segment. However, the company ramped up its personal loan business to offset the struggles, and student loan payments on federal loans are expected to resume on June 30 of next year after the Biden administration once again extended the moratorium. So eventually the business should resume a more normal pace.
SoFi also made several big purchases in recent years to create a tech business. The first was Galileo, which helps companies with various payment capabilities such as account setup, accounting funding, and direct deposit. Through its clients, Galileo had 124 million accounts at the end of the third quarter. More recently, SoFi acquired the cloud core processing company Technisys, which offers banks and fintech companies a more modern, multi-product tech operating system.
SoFi now has 4.74 million customers. It's projecting annual revenue this year of as much as $1.52 billion and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of up to $120 million.
Nu Holdings: A disruptor in Latin America
Backed by Warren Buffett's company Berkshire Hathaway, Nu went public at a huge roughly $41 billion valuation and is trading down more than 55% this year.
But Nu continues to post incredible growth. At the end of the third quarter, it had an astounding 70 million-plus customers and currently banks roughly 39% of the Brazilian adult population. And it's doing this with an industry-leading customer acquisition cost of just $6.
The company found a great product market fit by offering customers low-fee banking products wrapped in a sleek digital experience. Millions of customers have opened their first bank accounts or gotten their first credit cards from the company.
Because of the nature of the company, Nu's monthly average revenue per active customer (ARPAC) of $7.90 isn't nearly as high as incumbent banks in Brazil, which can range from $33 to $54. But the company is making progress, with some of Nu's most mature customer cohorts generating ARPACs of $22 and management seeing plenty of opportunity for ARPAC expansion moving forward.
Nu also seems to be doing a good job of balancing growth with profitability. In the third quarter, Nu generated a small profit of $7.8 million on revenue of more than $1.3 billion. Furthermore, Nu is already seeing fast growth in other Latin American countries like Mexico and Colombia, where it has about 3.5 million customers and is already the No. 1 credit card issuer in both of those countries.
Which is the better buy?
While both SoFi and Nu will likely benefit if interest rate hikes level off and there isn't a severe global recession next year, I think Nu is the better long-term buy.
I'm certainly interested in the potential of SoFi's tech business with Galileo and Technisys, but Nu's growth is absolutely explosive. Management is also demonstrating a clear path to profitability, and in Q3 Nu had a 55% efficiency ratio, which shows expenses as a percentage of revenue. The lower the efficiency ratio, the better, and a sub-60% efficiency ratio is really good for Nu at this point in time.
Management at Nu has also said that at this early stage, its growth in Mexico and Colombia is even faster than what it saw in its Brazil business at the same point in time. So the growth is explosive, management seems aware of profitability, and the current valuation affords investors the opportunity to get in cheaper than Buffett and Berkshire did.
