SoFi technologies (NASDAQ: SOFI) may be on the cusp of a recovery after falling off a cliff this year. It doubled last year and fell early this year, but has risen more than 40% in the past three months. That’s often the way with the markets, especially young growth stocks.
But there’s another young digital banking stock that hasn’t taken a break from skyrocketing profits. It also doubled last year, and will increase by about 75% in 2024. In case you forget and buy SoFi Now Holdings (NYSE: NOW) stock instead?
There’s no stopping now
SoFi and Nu run similar businesses, with one notable difference: they operate in different regions. Although SoFi is an American star, Nu has taken hold of its home country of Brazil and is making headway in two newer markets, Mexico and Colombia.
Now it started in 2013 and went public in 2021. Since then, the company has consistently delivered excellent performance, with regular, high double-digit percentage revenue increases and substantial increases in average revenue per active customer (ARPAC).
It’s easy to understand why Nu appeals to Brazil’s adult population, more than half of which are already members. Chief Executive Officer David Velez first tried to open a bank account in Brazil in 2012, requiring months of paperwork and phone calls to get the account off the ground and high costs to keep it open. Together with a group of like-minded entrepreneurs, he managed to break the Brazilian banking oligopoly and deliver a better experience.
Now is completely digital, with low costs and high savings rates. It attracts millions of new customers every year, and although it is already popular in Brazil, it still attracts the majority of its new customers there. Brazil is the largest country in Latin America, with more than 200 million inhabitants, so there are plenty of opportunities to add new members. Now that the company is firmly established in its home market, it continues to gain market share in new markets. The slow pace of expansion ensures better financial results and keeps the runway long.
The new markets are not yet profitable, as is the case with most new companies, but the operations in Brazil are profitable enough for the company to make these kinds of moves without worrying about the bottom line. Despite the growth and expansion, the company has been profitable for the past six quarters, with its profit margin increasing from 12% to 17% in the second quarter.
It also caught the attention of legendary investor Warren Buffett, who invested in the company through the company Berkshire Hathaway in late stages of pre-initial public offering (IPO) financing and currently has a small stake in the company.
Forgot SoFi?
Where does SoFi fit into this? SoFi’s performance isn’t as great as Nu’s, and it’s only getting profitable. It is still growing rapidly and also brings in millions of customers per year.
However, credit performance has held the company back. Although it has expanded into a full suite of digital financial services, the company’s original core business is lending. Lending has slowed due to high interest rates, and most of the shiny, new profits are coming from that side of the business. But as interest rates start to fall, the market feels that SoFi has become a bargain and will likely recover quickly.
I own both stocks and recommend them both. I see SoFi as a bit riskier than Nu, but with great potential. So if you have a lower risk tolerance, you may want to choose Nu over SoFi. Yet each of these companies is disrupting the status quo in its own region and offering the opportunity for explosive profits for investors.
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Jennifer Saibil holds positions in Nu Holdings and SoFi Technologies. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
Should You Ignore SoFi and Buy These Beautiful Digital Bank Stocks Instead? was originally published by The Motley Fool
