Buy better: SoFi or Affirm?


Last year, financial technology or fintech stocks were all the rage. Many fintech companies have seen their stocks soar and reach astronomical valuations. But this year, as interest rates have jumped, investors have become much more selective about these stocks. In fact, the market this year has been brutal for most fintech stocks.

Two of the most popular that fall into this category are digital banking SoFi (SOFI -1.57%) and buy now, pay later (BNPL) To affirm (AFRM -0.67%). Shares of SoFi are down more than 64% this year, while shares of Affirm are down more than 78% in the same period. These declines create a potentially interesting entry point. Let’s see what is the best long-term buy.

SoFi: one-stop-shop for financial services

SoFi is a digital bank that seeks to provide all financial services to high-income people, typically those earning more than $100,000 per year. Most consumers obtain financial products from at least several different banks, but SoFi wants to be the one-stop-shop and meet all the financial needs of its target customer base.

The company offers checking and savings accounts, online investing capabilities, credit cards, mortgages, personal loans, student loan refinances, and personal finance tools. SoFi also owns several tech banking companies that are truly B2B businesses but could be an attractive and diverse revenue stream over time. Earlier this year, SoFi secured a banking charter through the acquisition of a small California bank, which now allows it to hold deposits and use them to fund a portion of its loans.

SoFi has done a good job attracting new members and bringing them to its flywheel, which is a key strategic priority for increasing cross-selling and lowering customer acquisition costs. In the second quarter, SoFi generated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $20 million on adjusted revenue of $356 million.

The bank should also benefit from the expiration of the student loan moratorium at the end of the year and President Joe Biden’s plans to forgive $10,000 in student debt for some borrowers.

With the moratorium in place for more than two years, borrowers have not had to make payments on their federal student loans, which has understandably depressed refinancing activity. Borrowers have also put off refinancing expecting some sort of relief to arrive, so borrowers now have the clarity they need to decide whether or not to refinance. Student loan refinancing, which was SoFi’s largest product before the pandemic, has been operating at around half capacity or less since the moratorium was put in place.

Despite SoFi’s success, I’d like to see the company reduce its high levels of stock-based compensation and start trimming the loss of its financial services division, which includes checking and savings accounts and its investment brokerage. investing online. The financial services division is one of the primary ways SoFi attracts customers, but the costs of customer acquisition are starting to look unprofitable if SoFi can’t lead the way to profitability in this division.

Affirm: BNPL mania

Started by the old PayPal co-founder Max Levchin, Affirm brought BNPL to the masses in a big way. BNPL allows people to buy property with no down payment and then pay it back on a schedule of installments.

Affirm allows people to do this with a variety of products, including interest-bearing BNPL loans and short-term and long-term BNPL loans. The company is also preparing to roll out its Affirm+ debit card, which has the BNPL option.

The opportunity Affirm has is enormous. The company has signed several major partnerships with companies such as walmart, Amazon, Shopifyand eBay. Affirm’s partners process approximately 60% of all e-commerce sales in the United States. Additionally, the North American e-commerce market was valued at $900 billion in 2021, and BNPL’s sales only accounted for $34 billion of this total addressable market.

In fiscal 2022, which ended June 30, Affirm’s gross merchandise volume (GMV) through its platform reached $15.5 billion, compared to $8.3 billion for the fiscal year 2021. The company expects between $20.5 billion and $22 billion in GMV for fiscal year 2023.

I think one of the big things that casts doubt on Affirm’s business is credit quality. BNPL products are actually short-term loans, and there have been many reports of BNPL borrowers making late payments. Additionally, Affirm saw delinquencies rise in July and August and write-offs – which are debt unlikely to be collected and a good indicator of actual losses – also surged in Affirm’s latest quarter.

This was partly expected as credit conditions normalize amid higher interest rates, but I’m sure investors are wondering how credit will continue to perform if the US economy slides into a deeper recession. severe.

What’s the best buy?

While Affirm is certainly the biggest potential opportunity, SoFi is the best buy. SoFi is generating strong growth, and I think it will be much better insulated in the event of a severe recession.

The company caters to very strong borrowers with high credit scores and high annual incomes. Additionally, being able to gather deposits and hold them in the bank gives SoFi a very stable source of funding and a much better framework to hold loans on its balance sheet.

There are a lot of things about Affirm that I just don’t understand, like credit quality. It makes me very uncertain about the company right now.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Bram Berkowitz has no position in the stocks mentioned. The Motley Fool has positions in and recommends Affirm Holdings, Inc., Amazon, PayPal Holdings, Shopify, and Walmart Inc. The Motley Fool endorses eBay and recommends the following options: long Jan 2023 $1,140 calls on Shopify, short Jan 2023 1 $160 calls on Shopify, and short October 2022 calls of $50 on eBay. The Motley Fool has a disclosure policy.


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