With their share prices up 102% and 40% year to date, SoFi Technologies (SOFI +2.10%) and Kinsale Capital (KNSL +0.38%) have been firing on all cylinders. While SoFi grew its revenue by 37% in the most recent quarter, Kinsale saw its gross written premiums rise by a staggering 58% -- far outpacing the tepid growth often seen in the financial sector.
Led by such outstanding growth rates, these businesses and their unique operations offer investors market-beating potential for decades. However, at today's elevated prices, which is the better purchase for buy-to-hold investors?
SoFi: A well-balanced attack on growth
With 6.2 million members -- a figure that grew by 44% year over year in the second quarter -- SoFi's growth over the last few years has been nothing short of astronomical. Despite this impressive growth, SoFi stock is finally returning to its initial public offering (IPO) price in 2020.
NASDAQ: SOFI
Key Data Points
Initially known for its student loan refinancing operations, the company now operates through three business segments: lending, technology platform, and financial services. While student loans are still an area of focus for SoFi, the moratorium on student loan payments placed the unit on the back burner for a couple of years.
Due to this moratorium, student loan originations declined from $859 million in Q2 2021 to $395 million in Q2 2023. However, the suspension is set to end on Sept. 1. With more than 40 million Americans still paying on federal student loans, there is enormous potential for some of these debtors to consider refinancing through SoFi.
While the student loan unit faced these struggles, personal loan originations nearly tripled from $1.3 billion to $3.7 billion over the same time frame -- highlighting the budding diversification in SoFi's lending segment. Furthermore, its recent entry into making home loans adds another layer of diversification as the housing market recovers.
Best yet for investors, despite the growth from personal loans and the potential for increased student loan refinancing over the next year, SoFi may have an even brighter growth prospect in its financial services segment. With revenue rising 223% in Q2 from a year earlier, SoFi's young banking segment is exploding thanks to its 4.5% savings account that leaves most other banks in the dust.
Now accounting for 19% of SoFi's revenue, the financial services segment has increased its deposit base to nearly $13 billion compared to just $1 billion at the start of 2022. These deposits are precious to the company's bottom line as they allow for a lower cost of funding for its lending segment, which can be seen in the company's improving net profit margin.
Data source: YCharts
Buoyed by this cheaper funding, management expects the company to reach net profitability by the fourth quarter of 2023. Trading at 4.7 times sales, SoFi's promising growth, potential profitability, and diversification across its business are priced reasonably, making it an excellent buy-to-hold investment, even after doubling to start 2023.
How long can Kinsale's incredible growth last?
As the only pure-play excess and surplus (E&S) insurer on the stock market, Kinsale Capital shows the benefits of being the best operator in a unique niche. Primarily insuring smaller accounts, Kinsale focuses on hard-to-assess (or somewhat unusual) risks that its competitors tend to avoid.
Thanks to this exclusive focus on E&S insurance (such as commercial property, casualty, construction, personal liability, and product liability), the company generates efficiencies that its more diversified peers can't match.
For insurers, the best way to measure a company's efficiency is by calculating its combined ratio. The combined ratio is expenses needed for operations plus incurred losses on policies divided by the total premiums received -- with a number below 100% demonstrating profitability.
In its most recent quarter, Kinsale recorded a combined ratio of 77%, showing that it is highly profitable. The company's figures are outstanding compared to its specialty insurer peer group's average of 97% from 2020 to 2022. Better yet, this outperformance is not a one-quarter phenomenon, as Kinsale has an average combined ratio of 81% over the same time.
Led by this superior underwriting and efficiency, Kinsale's stock has easily outpaced the market.
NYSE: KNSL
Key Data Points
However, the true beauty behind these impressive results is that the company can build off these past successes as it creates a treasure trove of data and analytics for future underwriting on its proprietary technology platform. While investors are forced to take a leap of faith with this data and technology advantage -- which the company touts but never reveals in great depth -- its past results speak for themselves.
Guided by a management team with over 150 years of insurance experience, the company is founder-led by Chief Executive Officer Michael Kehoe, who left one of the company's most prominent peers, James River Insurance, to start Kinsale.
Over the long term, management expects Kinsale's premium growth to stabilize in the low double-digit percentage range but believes its high growth so far in 2023 could extend into 2024 amid its current boom.
Data source: YCharts
Currently, Kinsale commands a lofty price-to-earnings ratio of 38. However, sporting one of the best combined ratios in the E&S industry along with these incredible growth rates, the company's experienced leadership team should keep things steady as it continues dominating its niche.
Better buy now
Picking the better buy now between the two probably depends on your investing style. Whereas Kinsale offers steady profitability and compounding returns over the long haul, SoFi may bring more home-run potential to risk-tolerant investors.
Ultimately, however, Kinsale's proven profitability and six-bagger returns over the last five years indicate that it has already built a moat around its unique niche and may be poised to continue delivering outsized returns for decades.
