Fintech continues to become a way of life for many people around the world who rely on smartphones and digital technology to run their finances and make purchases. While it's already the norm, in many ways fintech companies are just cracking open long-term opportunities in banking, investing, shopping, and myriad other financial activities.
SoFi Technologies (SOFI 3.69%) and Nu Holdings (NU 1.66%) are two of the hottest fintech stocks. There's a lot to like about both, and they each come with their own set of risks. Which one is the better buy today?
The case for SoFi: High consumer engagement
SoFi has made the jump from niche fintech player to fully loaded online financial services provider. That's no easy feat in the competitive arena of digital banking. Investors who bought into its potential early haven't necessarily been rewarded, though. SoFi stock burst onto the investing scene with a high valuation at the end of a bull market, and it's off 68% from its highs just after its initial public offering (IPO). It's a good illustration of the risks associated with buying an IPO stock.
But it's also a good example of thinking long term if you understand how a company works and why it deserves confidence. Any investor who bought early but is still holding on might be well rewarded down the line as SoFi demonstrates growth, increasing profitability, and a model that's generating strong member engagement.
SoFi is still associated with its roots as a student loan company, and in 2012 it was the first company to offer refinancing for both federal and private student loans. It quickly grew in popularity for this cohort of young professionals and university students, and it leveraged that popularity to expand its services, offering the same consumer-centric and easy-to-use digital tools that appeal to its clientele. That proved to be an overall attractive concept, and now it's adding hundreds of thousands of users quarterly, for a current total of more than 6.2 million.
There's still plenty of room to grow its business by adding members, but there's at least an equal opportunity to grow through upselling and cross-selling products and services. It added 584,000 members in the 2023 second quarter sequentially, but it added 847,000 new products.
The combination has made SoFi into a powerhouse. It has expanded its product line to all kinds of loans, credit cards, and investing services, and through its acquisition of Golden Pacific Bancorp last year, it acquired a bank charter and now offers bank accounts as well.
Revenue increased 37% over last year in the second quarter, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 278% to $77 million, both ahead of expectations. Management is expecting to reach generally accepted accounting principles (GAAP) profitability by the end of the year.
The risks with SoFi are that it's not profitable yet and it's still young. It's made incredible progress, and it looks like it's moving into safer territory, but it's not quite there yet. It's not very expensive at this point, trading at under 4 times trailing-12-month sales.
The case for Nu: Scaling into robust profitability
I was almost going to make the eye-rolling headline for Nu be the same as for SoFi, because their models and prospects are similar although they serve different populations. But since Nu has already managed to become profitable, that's the feature that really stands out as making the case to buy its stock.
Nu is a Warren Buffett stock, and it's a rare type of Buffett stock. It's a young, tech-oriented growth stock that was losing money when Berkshire Hathaway first invested in it even before it became public.
Buffett loves bank stocks because they have lots of cash, and that's one of the keys to a viable company. Banks use their cash for interest and also to fund other ventures, and Nu has been doing a great job of both.
Like SoFi, it's adding members, but at a faster rate. It gained 4.6 million members in the 2023 second quarter, which was 18 million more than last year. It counts 46% of the population in its headquarter country of Brazil as members, and while it continues to add substantial numbers to that presence, to the tune of 1.5 million per month, it's growing by triple-digits in Mexico and Colombia.
It's also expanding its product line. On top of its core business of digital bank accounts, it offers credit cards, investing, insurance, loans, and similar financial services. It also has a growth strategy focused on upselling and cross-selling products to its customers.
Nu has been able to grow its average revenue per active customer (ARPAC) significantly while keeping its cost to serve stable. ARPAC increased 18% over last year in the second quarter to $9.30, while cost to serve remained at $0.80. The activity rate is also increasing as members engage with the platform, rising from 80.2% last year to 82.2% this year.
Its credit business is flourishing as well. Total deposits increased from $13.3 billion last year to $18 billion this year, driving an increase in net interest margin from 9.7% to 18.3%.
Management is scaling the business while keeping costs down, resulting in increasing profits. Net loss of $29.9 million last year switched to net income of $244 million this year.
It was the second consecutive quarter of positive net income, so I can't say Nu is sustainably profitable yet, which is one of the risks of owning it. The other yellow flag is that it sports a premium valuation of almost 8 times trailing-12-month sales.
Which is the better buy today?
I see the bull cases outweighing the bear cases for both SoFi and Nu. And the good news is, you can buy both. I recently took a small position in each of these stocks, and I recommend them for any investor who has some risk tolerance.
However, if I could only pick one today, it would probably be Nu. It has the benefit of already being profitable, the backing of Buffett, and an incredible market opportunity. I believe that justifies its premium valuation, but I would recommend dollar-cost averaging over time.
