If there's a disruptor of the moment right now in the financial industry, it would appear to be SoFi Technologies (SOFI 2.06%).
The online bank, whose name is short for Social Finance, has expanded from a student loan financing started in 2011 to a company offering a wide array of services including personal loans and mortgages, checking and savings accounts, and even an investing platform.
Fintech investors are typically chasing growth, but SoFi, which is now a chartered bank, is very much competing against traditional banks, which trade at a much lower multiple.
To see how SoFi stacks up against the competition, let's take a look at how the fintech disruptor compares to JPMorgan Chase (JPM 0.06%), the biggest bank in the U.S. by assets.
Image source: Getty Images.
The SoFi value proposition
SoFi went public in 2021 through a special purpose acquisition company (SPAC), and like most SPACs, the stock has lost money since its debut. However, the disruptor has shown signs of life this year with the stock up 76% this year.
The company aims to be a one-stop shop offering the traditional services of a bank and features that other fintechs specialize like a Robinhood-like stock trading platform, personal loans similar to Upstart, and student loan financing. It also tends to target more affluent customers, who are generally more valuable as they can use more of SoFi's services and have more money to deposit and invest.
While other fintech stocks have floundered in the current macro environment, SoFi has continued to grow, posting 37% growth in its second quarter, to $498 million. Member growth also remains strong with members up 44% to 6.2 million after it added 584,000 members in the quarter.
On the basis of earnings before interest, taxes, depreciation, and amortization (EBITDA), the company is profitable with EBITDA nearly quadrupling in the quarter to $76.8 million.
The company aims to drive new business by linking benefits like higher savings rates with direct deposits, and 90% of deposits now come from direct deposit members.
Among its risks are that most of its lending revenue comes from unsecured personal loans, and it doesn't hold the loans on its balance sheet. If buyers for those loans dry up, which has hampered businesses like Upstart, its lending business will likely suffer.
Looking ahead, SoFi expects revenue growth to slow to 19%-26% in the second half of the year but it also expects to post a generally accepted accounting principles (GAAP) profit in the fourth quarter.
Fortress Dimon
JPMorgan Chase may not be valued like the growth stock SoFi, but its third-quarter results might convince you it should be.
Managed revenue rose 21% to $40.7 billion and earnings per share jumped 39% to $4.33. Both numbers beat analyst estimates.
The company executed well in the quarter with all four of its segments except corporate and investment banking showing strong growth. Consumer demand continued to grow with debit and credit card sales volume up 8%. Loans across the business rose 17%, and net interest income improved by 30%, or 21% excluding its acquisition of First Republic's assets, to $22.9 billion.
CEO Jamie Dimon continued to warn that the economy could go sour, noting geopolitical risks, consumer savings drying up, and the impact of higher interest rates, but the bank seems well prepared for any headwinds the economy might throw at it as its capital ratios are strong. The company also lowered its provision for credit losses slightly in the quarter, a sign it may see the credit environment starting to improve.
Management underscored the value of its tech investments as it knows it has to be competitive or even stay ahead of fintechs like SoFi. Active mobile customers increased 9% in the quarter, showing more customers are using its apps, and Dimon pushed back on the notion that banks won't lead the way in the AI revolution in the financial industry, noting that banks have "an extraordinary amount of proprietary data."
In other words, JPMorgan Chase seems to have done a good job of evolving with customer expectations and retaining the strengths of a traditional bank.
The head-to-head comparison
SoFi and JPMorgan Chase are likely to appeal to different kinds of investors given their different profiles and valuations, but it's worth comparing the two stocks.
JPMorgan Chase trades at a price-to-earnings ratio of 9 and offers a dividend yield of 2.8%.
SoFi on the other hand is not yet profitable, and trades at a price-to-sales ratio of 4.2. It has a similar price-to-book ratio to JPMorgan Chase at 1.5.
SoFi's growth has been impressive thus far, and the company may be the most exciting disruptor in fintech. However, its guidance shows that revenue growth is expected to slow significantly, and the company is likely more at risk from a sustained economic slowdown than an established bank like JPMorgan Chase.
JPMorgan Chase may not have the growth potential of SoFi given its much larger size, but it's proven it can overcome the cyclical risks in the banking industry, and it has a long track record of growing profits and raising its dividend since the beginning of the financial crisis.
I think JPMorgan is the easier stock to own right now of the two and looks like a good bet to deliver solid returns. If SoFi can get through the current volatile climate, however, the stock could have significant growth ahead, but I'd like to see how its growth rate holds up over the next few quarters.
