High inflation, rapid increases for interest rates, and the threat of a prolonged economic downturn have combined to do a number on valuations for fintech companies. PayPal (PYPL -2.36%) and SoFi Technologies (SOFI -1.70%) are among those that have seen crushing stock sell-offs, and they currently trade down 76% and 77%, respectively, from their highs.
Which of these beaten-down fintech players presents a better investment opportunity at today's prices? Read on to see why two Motley Fool contributors disagree on which one you would be better off putting your money behind.
SoFi is growing its market share while approaching profitability
Parkev Tatevosian: SoFi Technologies has done an excellent job attracting customers, increasing revenue, and progressing toward profitability. Indeed, between 2018 and 2022, SoFi's revenue soared from $259 million to $584 million. The company offers an industry-leading savings rate to customers signing up for direct deposit on its platform. The Central Bank in the U.S. has raised interest rates aggressively, making it a worthwhile business proposition.
From the fourth quarter of 2019 to the fourth quarter of 2022, SoFi increased its total number of customers from 976,000 to 5.2 million. That's strong evidence of its customer value proposition.
It's not easy to get people to switch banks. Folks likely have numerous auto-pay bills set up, direct deposits from employers, and other financial arrangements that are time-consuming to change. If people are going through that arduous process to switch banks, it shows the magnitude of their attraction to SoFi.
SoFi net income (TTM) data by YCharts. TTM = trailing 12 months.
More impressively, SoFi is not spending an arm and a leg on getting customers to switch. It has made solid progress toward profitability, and net losses in the trailing 12 months bottomed in January 2022 (see the chart above).
Management expects to deliver positive net income by the fourth quarter of this year. Investors might want to buy the stock now before it accomplishes that. Otherwise, you might be paying a considerably higher price for SoFi stock.
PayPal is an attractively valued fintech giant
Keith Noonan: PayPal has already established itself as a clear leader in payment service technologies, and the company has avenues to continue growing sales and improving operational efficiency in order to boost profitability.
The company is also buying back and retiring stock, which is a catalyst for earnings per share because it reduces the total number of shares outstanding.
Even in the face of a challenging economy, the company remains strongly profitable, and big share sell-offs have pushed the valuation down to levels that leave room for long-term investors to see market-crushing returns. Trading at roughly 15 times this year's expected earnings, PayPal looks like a great buy for investors seeking exposure to the fintech industry.
PYPL PE ratio (forward) data by YCharts. PE = price-to-earnings ratio.
Despite pressures, PayPal's business continues to hold up well. The company still managed to increase revenue 7% year over year to reach $7.4 billion in last year's fourth quarter, and total payment volume across its platforms climbed 5% to $357.4 billion. Even with some unfavorable macroeconomic conditions, the company expects that it will actually be able to increase adjusted earnings per share roughly 18% this year.
While near-term performance might remain under pressure, PayPal almost certainly has the strong foundations needed to make it through periods of prolonged macro headwinds. If smaller upstart rivals fold under the weight of mounting financial pressures from the broader economy, PayPal's competitive positioning could actually improve.
While SoFi's smaller market capitalization and larger relative growth potential suggest that its stock could ultimately go on to deliver more explosive returns, I believe that PayPal offers the better risk-reward profile at current prices.
Which fintech stock is a better recovery play?
Of all the companies that have seen dramatic valuation pressures in the face of tough macroeconomic conditions, those in the fintech space have been among the hardest hit. High inflation and rising interest rates are particularly disruptive for these businesses, and the prospect of a recession adds another bearish wrinkle to the risk assessment.
But in all likelihood, these challenges won't last forever, and investing in the right fintechs could have big payoffs when broader industry conditions improve.
For investors willing to take on more risk in pursuit of explosive returns, SoFi is probably the more attractive of the two stocks. While the business isn't posting profits yet, it is still growing at a rapid pace, and the stock could soar if the company successfully transitions into delivering reliable earnings on growth.
For those seeking fintech stocks that already look cheap on a price-to-earnings basis, PayPal should probably be the clear favorite. While revenue growth has slowed and net income dipped last year, the company forecasts a return to adjusted earnings growth this year, and the industry leader is trading at multiples that indicate an attractive risk-reward dynamic.
