Investing at the intersection of financial services and technology can be a lucrative endeavor. Companies operating here, such as Block (XYZ +3.21%) and SoFi Technologies (SOFI +5.12%), provide critical products and services to their customers. And they're staring at tremendous growth opportunities.
Both have their merits, but which of these fintech stocks is the better buy right now?
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Block: Serving merchants and individuals with a Bitcoin twist
NYSE: XYZ
Key Data Points
Block (originally known as Square) started out selling a small credit card reader that could be attached to a smartphone, helping small merchants accept payments wherever they were. Today, the business has morphed into much more. The company's Square segment offers a wide range of products, software, and financial services that help facilitate commerce. In the first quarter, Square handled $54 billion in gross payment volume.
The company also operates Cash App, a personal finance platform that can be used as a substitute for a traditional bank. Besides sending and receiving money, Cash App offers direct deposit, savings accounts, debit cards, stock trading, and Bitcoin trading. Cash App ended Q1 with 57 million monthly active users.
Both Square and Cash App continue to grow their gross profits at or near double-digit percentage rates. Yet, despite the success of these two ecosystems, Block co-founder and CEO Jack Dorsey has shifted his attention more to Bitcoin, the world's leading cryptocurrency. Block has developed and now sells a Bitcoin hardware wallet. It's working on crypto mining equipment. And merchants who use Square will be able to accept payment in Bitcoin. It's all part of a strategy intended to boost adoption of the crypto.
Critics won't hesitate to call this a distraction from what should be Block's main focus -- offering financial products and services to merchants and individuals. But if Bitcoin continues on its impressive trajectory, and Block finds a way to monetize its related activities, these efforts could be a boon for the business in the long run.
SoFi: Becoming a leader in digital banking
NASDAQ: SOFI
Key Data Points
While the massive money-center banks get most of the attention, SoFi has made a name for itself by carving out a niche in the financial services industry with a focus on innovation and disruption. It emphasizes providing its customers with an exceptional user experience, operating with no physical bank branches, and leaning heavily on technology.
It's clearly working, as SoFi currently has 10.9 million customers, more than triple the number it had at the end of 2021. SoFi has done a great job of targeting a younger and more affluent demographic. This is a valuable group to cater to because they could be SoFi customers for decades, taking advantage of more of its services as their financial lives evolve.
Its revenue is also soaring: It rose 20% year over year in Q1 to $772 million. SoFi makes money, unsurprisingly, from the interest it collects on student, personal, and home loans. This is an important business line. However, the company is seeing monster growth from financial services, like checking and savings accounts, credit cards, and brokerage offerings, where its revenues more than doubled year over year.
Throughout most of its history, SoFi posted net losses. That's not a shock, as it was able to access cheap capital that it deployed in pursuit of rapid growth. Generating profits was not a priority. This dynamic has shifted, though, and last year, SoFi reported positive net income. The management team sees the bottom line rising rapidly in the years ahead.
Different perspectives
The past year has been wildly different for these companies' stocks. Block's share price has climbed just 4% in the past 12 months (as of July 8). Over that same period, SoFi's stock price has rocketed 211% higher.
Block's business growth in the face of macroeconomic headwinds has been noteworthy. And the company has added upside potential from its Bitcoin-related endeavors. On the other hand, SoFi keeps putting up solid financial performances as its profitability improves. In my view, both of these businesses are worthy of owning, regardless of how their shares have done recently.
