Banking is a centuries-old industry. In America alone, the financial system spreads across thousands of banks and credit unions of all shapes and sizes. Many of those banks operate traditionally with very analog interactions. But that doesn't mean that technology isn't steadily making its way into how people spend, save, and move their money.
For instance, digital banks have popped up in recent years. Banking online gives people more access to banking services, especially for people in less-developed economies who have trouble accessing a traditional bank. Additionally, younger consumers gravitate toward digital apps and mobile banking instead of going to traditional brick-and-mortar branches like past generations.
SoFi Technologies (SOFI 3.69%), Block (SQ 2.32%), and Nu Holdings (NU 1.66%) may pale in comparison to megabanks like Bank of America or JPMorgan Chase, but their growth shows that these tech-based financial institutions could become significant competitors in the future. That's why investors should have these three digital banking stocks on their radar.
1. SoFi Technologies
Serving consumers in the United States, SoFi has surged in popularity in recent years. The company began in student loan refinancing but has expanded and built a financial super-app, offering customers banking services, payments, investing tools, credit scores, and loan access from their smartphones. SoFi didn't even receive its banking charter, the license to accept and loan deposited funds, until two years ago.
The company only had 1 million users at the start of 2020 but has since exploded to over 7.5 million. Remarkably, it's maintained its momentum. Active users grew 44% year over year in the fourth quarter, an impressive growth rate on top of a user base of millions of people.
Another part of SoFi that's unique is its Galileo business. Galileo is a technology platform that partners with issuing banks to offer financial services in North and South America. In other words, SoFi is a rapidly growing bank and fintech business. Galileo serves 145 million accounts across its partners.
SoFi's revenue grew 35% year over year in Q4, finishing 2023 at $2.1 billion. The company also turned profitable on a generally accepted accounting principles (GAAP) basis, earning $0.02 per share in Q4. This sets up strong earnings growth as continued growth outpaces SoFi's expenses.
Banking is a massive industry, and SoFi's popularity gives it a potentially lucrative runway that makes the stock a no-brainer buy-and-hold investment idea. At just over $8 per share, it's a low hurdle for investors to accumulate shares.
2. Block
Starting as a credit card reader for mobile devices, Block (formerly Square) has evolved and expanded into a diversified fintech conglomerate today. The business functions as two distinct ecosystems of services.
On one side is Square, a do-it-all operating system that can run a business, from payments to scheduling, inventory management, and marketing. Cash App is the other, a digital banking product that began with peer-to-peer payments but now includes banking and investing services. Block spent $29 billion to acquire buy now, pay later company Afterpay, which closed in early 2022.
Cash App has amassed an estimated user base of 50 million people in the U.S. and U.K. Cash App is the top finance app on Apple's App Store and a top 10 overall app on Alphabet's Google Play Store. The Cash App ecosystem is approaching $1 billion in quarterly gross profit and should further grow profits as users adopt more of Cash App's services.
Evidence of that shows up in multiple spots. For example, the Cash App payments card has 22 million active monthly users. Cash App Pay, a digital payment product, doubled its monthly users to over 2 million in the three months from Q2 to Q3 this year. Increased usage (and the resulting gross profit growth) should deliver bottom-line earnings over time.
Analysts believe the company's earnings can compound at 34% over the next three to five years. The stock's $66 share price makes dollar-cost averaging an effective way to build your investment.
3. Nu Holdings
Latin America is a big opportunity for digital banking, since the economy there isn't as mature as that of the United States, and not everyone has easy access to even basic banking services.
Nu Holdings is a digital bank in Brazil, Mexico, and Colombia. The company has 89.1 million customers and is still growing -- its customer base grew 18% year over year in the third quarter.
The company has multiple ways it can grow. Latin America has a population of 668 million. That's a greenfield of potential customer growth if Nu can expand into new countries over time.
Second, Nu continually adds new products and services, which will generate profit growth as existing customers use multiple services. Lastly, Nu Holdings is already a highly profitable company. Nu spends $7 on average to acquire a new customer and less than $1 each month to service them.
That all points to rapid earnings growth moving forward. Net income was $303 million in Q3, up from just $7.8 million a year ago. Analysts believe Nu Holdings will earn $0.35 per share in 2024, and it doesn't take a mathematician to see how earnings could grow far higher over the coming five to 10 years at this pace.
The stock trades at a forward P/E of only 28, making shares a table-pounding value with enticing long-term potential. The best part? Shares are easy to accumulate, no matter your budget, at just under $10.
