Two stocks that have been in the news a lot in recent years are the digital consumer banks SoFi Technologies (SOFI -10.48%) and Ally Financial (ALLY -0.36%), both of which employ a branchless banking model.
Ally was spun off from General Motors in 2006 and formally rebranded as Ally in 2010. SoFi was founded in 2011 and went public through a special purpose acquisition company in 2021.
While both are similar on the surface, SoFi and Ally target different customers and have different products and services that set them apart. With that said, let's take a look at which is the better buy.
Different business models
At the end of 2022, SoFi had roughly $19 billion in assets under management. The company wants to be a one-stop-shop financial services company for high-income earners and allow these customers to access all of their banking needs through SoFi.
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The company has three separate divisions. Its largest and most profitable unit is its lending division, which offers mortgages, student loan refinancing, and personal loans. Due to the student loan moratorium, SoFi has had to step back in student lending and has ramped up personal lending.
SoFi's next division is its technology unit, which encompasses the bank's acquisitions of Technisys and Galileo. Technisys sells next-generation cloud-based core processing technology to banks and fintech companies. Galileo is a payments platform that allows financial and non-financial firms to offer payment capabilities and products.
SoFi's last division is its financial services division, which includes its checking and savings accounts, online investment brokerage, credit cards, and personal finance tools. This division has regularly operated at a loss but its goal is to bring customers into the SoFi ecosystem so the company can eventually cross-sell customers lending products.
Ally has close to $192 billion in assets and specializes in auto lending, given its history with GM. The bulk of these loans are retail auto loans but Ally also has a large portfolio of commercial auto and corporate finance loans. Ally is also trying to serve the consumer more holistically, providing mortgage loans, credit cards, point-of-sale lending, and online investing capabilities.
Assessing the financial profile
Keep in mind that Ally has been around longer and SoFi only got its bank charter early in 2022, so it is still in the process of ramping things up.
In 2022, SoFi generated adjusted net revenue of $1.54 billion and adjusted earnings before taxes, interest, depreciation, and amortization (EBITDA) of $143 million, which equates to an adjusted EBITDA margin of 9%. SoFi, however, is not yet profitable under generally accepted accounting principles (GAAP). This year the company is guiding for net revenue of as much as $2 billion and adjusted EBITDA as high as $280 million.
Ally is coming off a strong year in 2022 in which it generated more than $1.6 billion in profit, or $5 of earnings per share in 2022, which was over $6 of EPS on an adjusted basis. This equated to a very strong 20.5% core return on tangible common equity, which is much better than the company did prior to the pandemic, largely due to dynamics such as elevated used car prices and healthy credit quality.
Management is guiding for adjusted earnings per share of $4 this year as it deals with higher funding costs and credit normalization in its retail auto lending portfolio. But then it expects adjusted earnings to bounce back to around $6 per share in 2024.
Which is the better buy?
Right now, I believe that Ally Financial is clearly the better buy, largely because it has a much more attractive valuation. Ally trades at less than its tangible book value, or net worth, and at less than 9 times forward earnings. Investors are worried about higher funding costs and elevated loan losses. However, I believe Ally is prepared for these loan losses and is also poised to put up better returns than before the pandemic.
SoFi is not yet profitable and trades at 212% to its tangible book value. I like the bank's strategy but do not yet believe it possesses any real moat with its funding or personal loan franchise. The market has given the company a growth valuation and while it could very well succeed, I like the risk-reward setup better for Ally.
