Two of the more exciting fintech companies today are SoFi Technologies (SOFI -1.11%) and Nu Holdings (NU -0.71%). Both are profitable and growing quickly with bright futures ahead. But from an investment standpoint, which one is a better pick?
SoFi Technologies has a compelling business model
SoFi is a pretty straightforward fintech play: It directly addresses the financial industry with a tech-focused approach. This allows it to tap huge addressable markets while also benefiting from the growth and scaling advantages of tech companies. Its financial platform is supposed to be a one-stop shop where you can register for a bank account or credit card, consolidate your student loans, send money to friends, and even purchase cryptocurrencies.
From a business perspective, the strategy is clear: create an ecosystem that provides its customer base with all the related financial services they need. That spreads out its customer acquisition costs while making it easier to launch new products to an established audience.
This is a compelling business model, but there's an issue: competition. Nearly every other financial services company -- and there are many -- is trying to follow a similar strategy, whether under its main banner or a sub-brand. That has raised SoFi's customer acquisition costs and lowered its profitability. It has also led management to dial back its growth projections, although the results from its latest quarter -- when both revenues and earnings exceeded estimates -- have the market feeling optimistic. Even so, SoFi trades at a higher valuation than Nu Holdings, which boasts a faster growth rate and a wider profit margin.
NU Revenue (TTM) data by YCharts
Nu Holdings' big advantage is a lack of competition
Even if you're a fan of fintech stocks, you may have overlooked Nu Holdings. That's because it operates solely in Latin America, with a presence in Mexico, Colombia, and Brazil.
Nu's business model is very similar to SoFi's. Its customer base accesses its financial services platform through its smartphone app, which offers products that range from crypto wallets and ETF investing to insurance and checking accounts. The key difference between them, however, relates to the competitive landscapes where they operate. The Latin American financial industry is arguably a decade behind the U.S. in terms of market saturation and competitiveness. That's because, for years, the banking industry was controlled by a handful of powerful incumbents that mainly relied on physical branches.
Nu took the market by storm roughly a year ago, growing from essentially no customers to more than 100 million. An astounding 50% of all Brazilian adults are now Nu customers. A lack of competition in the fintech space and a large population of unbanked consumers has allowed Nu to grow more quickly, reaching its profitability inflection point sooner. That has resulted in higher profit margins and bigger overall profits compared to Sofi. Somewhat surprisingly, Nu shares trade at a deep discount relative to SoFi despite its superior competitive landscape, financial situation, and growth runway. Analysts expect Nu to grow its revenues by 31% over the next year, while SoFi is expected to grow by just 16%.
Nu doesn't have as much name recognition as SoFi, but its shares are significantly more compelling as an investment today.
