Financial stocks can cover the gamut of big, established banks through digital upstarts. SoFi Technologies (SOFI 3.69%) is a young and growing all-digital bank that's adding customers at a rapid pace. Bank of America (BAC -0.21%) is a large, traditional bank that pays a dividend. Which of these stocks is the better buy today?
High growth and increasing stability
Jennifer Saibil (SoFi): SoFi has been reporting incredible growth, and its strategy of recruiting new customers and getting them to adopt more products and services is leading to improved profitability. In addition to its core lending products, SoFi now offers banking accounts, investing, and more all on its easy-to-use digital app.
There was more of the same in the 2023 fourth quarter. Revenue increased 35% over last year, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was up 159%. It added 585,000 new accounts, a 44% increase over last year, for a total of 7.5 million, and it added almost 700,000 new products.
The big news was that SoFi reported its first quarterly net profit as a public company, which was $48 million. As customers engage more with SoFi's platform, it's leading to higher profits without corresponding expenses. It also doesn't have the high costs of real estate, since it does business completely online.
The market sent SoFi stock higher after this solid report, but the quick jump spooked investors, who sent it right back down. They're probably cautious about valuation and too-high expectations, and at the current price, SoFi shares trade at a price-to-sales ratio of 3.9, which is cheap for a high-growth stock.
The market might be too cautious right now, and that presents an opportunity for investors. Management is guiding for another net profit in the 2024 first quarter with a compound annual growth rate of 20% to 25% in revenue through 2026.
As interest rates ease, SoFi is in a great position to leverage its large and growing customer base to gain deposits, fund loans, and benefit from higher net interest income and revenue.
Great value and solid execution
Jeremy Bowman (Bank of America): SoFi and Bank of America likely appeal to different investors. One is considered a growth stock that some investors believe could disrupt the banking industry, while the other is a traditional commercial and investment bank and the nation's second-largest bank by assets.
However, while Bank of America might not have explosive growth potential, in many ways it looks like the kind of bank that SoFi aspires to be. It's diversified across consumer, commercial, and investment banking, and it's been well managed under CEO Brian Moynihan. In fact, Bank of America is Warren Buffett's favorite bank, and Berkshire Hathaway's second-biggest holding after Apple.
The stock also looks well priced at a price-to-earnings ratio of 11, and it currently pays a dividend yield of 2.9%, which could easily move higher.
Bank of America also looks poised to benefit from an expected economic expansion. The Federal Reserve has forecast interest rate cuts later this year, which should encourage more loans from businesses and consumers, the core of the company's business.
For its part, Bank of America has been early to say that it did not expect a recession, and that forecast seems increasingly correct. Falling interest rates and a more stable economy should help its earnings multiple expand as bank stocks fell in 2022 and 2023 due to an expected recession.
Lower interest rates will also help reduce charge-offs and its provision for credit losses, helping to boost profits. Overall, Bank of America has a strong management team, good value, and a solid dividend yield, and growth is likely to accelerate as interest rates fall and the economy expands.
Which stock is the better buy?
There are various approaches to deciding which of these stocks is the better buy today. SoFi affords greater growth opportunities, but it's unproven, so it comes with risk. It's only for investors who have an appetite for risk. Bank of America is a solid choice with stability and a high-yielding dividend, and the risk-averse investor would choose its stock over SoFi's.
However, a diversified portfolio could include both of these stocks, and investors could benefit from having a stable value stock like Bank of America along with a high-growth stock like SoFi.
