Investors have been watching the FinTech industry grow over the last few years and SoFi Technologies, Inc. (NASDAQ: SOFI) and Ally Financial Inc. (NYSE: ALLY) are two leading FinTech stocks that have attracted investors’ attention. The Oracle of Omaha – Warren Buffett – has $907 million invested in ALLY stock but has yet to invest a dollar in SOFI stock. To understand which fintech stock has the better chance of dominating this industry, its important to weigh the pros and cons of each to understand what Buffett sees in ALLY stock which may be missing in SOFI.
Why has Buffett invested in ALLY stock?
Having invested $1.7 billion since 2012 in the industry giant, General Motors Company (NYSE: GM), Buffet is an expert on the auto industry. His years of experience analyzing General Motor’s fundamentals could help explain what he sees in ALLY.
ALLY was once a financing division of GM which is how it began specializing in the auto loan industry. But after GM sold the rest of its 8.5% stake in ALLY for $900 million in 2013, ALLY has expanded by offering mortgages, credit cards, wealth management, and other services.
ALLY also frequently buys back its stock which may have caught Buffett’s interest since he believes that stock buybacks can be one of the best uses of corporate capital. In 2022, ALLY announced an authorization of $2.0 billion for share repurchases and given its history of share buybacks, ALLY may continue repurchasing its shares for the foreseeable future. This combined with ALLY’s quarterly cash dividends make ALLY stock an attractive investment for long-term shareholders.
How does ALLY stock compare to SOFI stock?
The main difference between the two FinTech companies is the source of their revenue. In 2022, 65.6% of ALLY’s total revenue came from the auto finance industry, while SOFI’s student loan refinancing services generated 59.7% of its revenue in 2019. While both companies specialize in loans, it’s worth noting that it can be more difficult to qualify for student loan refinancing than for auto loans depending on a customers credit history.
How are ALLY stock & SOFI stock similar?
ALLY and SOFI both offer commission free stock trading for investors with a high APY. ALLY’s savings account offers 3.60% APY and SOFI offers 3.75% APY with a direct deposit. This means that with a direct deposit, customer will earn a higher APY with SOFI, but without one customers earn a higher APY with ALLY.
Both companies offer multiple services such as mortgage loans, credit cards, insurance, etc. and are online banks with no physical locations. Given their different niches, it makes sense that ALLY’s customers tend to be millennials while SOFI’s customers tend to be students or fresh graduates.
ALLY Stock vs. SOFI Stock: Which has the Edge?
College education is essential in the US and without a college degree, career progression is much more difficult. This means SOFI’s specialization in student loan refinancing gives it an edge. For instance, 53.7% of the US working population in 2021 graduated from college and at least 75% of new jobs require a college degree.
Investors should also factor in the average cost of tuition, which has soared 31.4% from 2010 to 2020, and that the average student debt among college graduates is $28,000. The high cost of college education and its necessity for the US workforce mean that SOFI is in a great position to capitalize on this niche.
Given the current inflationary environment and high interest rates, it seems that demand for student loan refinancing will only increase. This is because employers are constantly looking for candidates with degrees and the number of jobs requiring this increases every year. This is likely one reason, SOFI’s CEO Anthony Noto expects demand for student loan refinancing to remain stable saying, “We’d expect the demand for that product (student loans) to really go through the roof and be back to normalized levels that we saw in 2019” once the moratorium ends.
However, SOFI’s edge as a provider of student loan refinancing has been dampened by the student loan pause. The company stated that it has lost $300 million to $400 million from the moratorium and SOFI is now working within the legal system to end the student loan moratorium. The Supreme Court already heard the oral arguments regarding the case and is expected to give a decision in June.
If things are not resolved by then or the Supreme Court rules against federal student loan forgiveness, then payments are expected to resume 60 days following the decision. In this case, a flood of refinancing requests could pour in by August giving SOFI’s revenues a much needed boost. Needless to say this would be a huge catalyst for SOFI stock and many are watching the Supreme Court’s decision to determine the SOFI stock forecast for this year.
ALLY Stock & the Auto Loan Industry
SOFI and ALLY share many things in common, but both companies have chosen to specialize in different niches, which means that their chosen specializations will influence their growth potential.
To understand the auto loan market, its important to realize that cars have become incredibly widespread among US households. In 2020, 91.55% of households reported having access to at least one vehicle, however, the number of registered vehicles declined between 2012-2019 by over 25 million. The average cost of a car in 2021 was $42,258 with an average payment of $563 per month. Today, it costs an average of $48,080 to purchase a new car. Rising inflation has caused new vehicle prices to increase 5.8% YoY according to February’s CPI report, although used car prices decreased 13.6% from last year. Moreover, around 31% of car owners relied on auto loans to pay for their car in 2022.
With ALLY specializing in the auto industry, its revenues may take a hit as the US enters a recession since consumers are less likely to purchase new or expensive vehicles if they are monitoring their budgets. For example, new vehicle sales dropped nearly 40% during the 2008 recession.
But comparing the size of the auto loan industry to that of student loans shows that SOFI’s industry may have the greater potential. The market size of the auto leasing, loans, and sales financing industry is $173.2 billion, while the student loan industry is valued at $1.76 trillion.
@FocusNotice believes FedNow will be an important catalyst for SOFI if big banks adopt Galileo FT and Technisys’ services
@RagingVentures notes that rising used car prices could help ALLY originate larger loans per car sold.
ALLY stock traded in a downward channel for all of 2022, but broke out of the channel at the start of 2023. ALLY stock tested its $34 resistance after beating earnings expectations in January. Since then the stock fell 38% due to profit taking and the banking crisis. It tested and rebounded off of the upper trendline and $21.91 support, possibly indicating a trend reversal.
Looking at the indicators, ALLY stock is trading above the 21, 50, and 200 MAs. The 50 and 200 MAs are also drawing together for a golden cross, signaling the start of a bullish trend. The RSI is approaching overbought at 61 and the MACD is bullish. Overall, these indicators appear to signal a bullish uptrend.
As for the fundamentals, ALLY is expected to report its Q1 2023 earnings on April 19th, EPS estimates are for $.886 and $2.07 billion in revenue. ALLY tested its $26.82 resistance leading up to its Q4 2022 earnings and could do the same in anticipation for its upcoming earnings.
The options flow for ALLY stock is overwhelmingly bearish with bearish premiums accounting for 57% of options activity. Premiums over $100,000 show an even split between bullish and bearish activity for contracts expiring April 21st.
In the long-run, ALLY stock could begin trading in a sideways channel between its $23.80 support and $34 resistance as it was before the Covid run-up.
SOFI has been trading in a sideways channel between $4.92 and $7.59 since April 2022, but within this larger channel a smaller downwards channel has formed.
Looking at the indicators, SOFI is currently trading below the 50 MA and above the 200 MA. SOFI is currently testing the 21 MA. The 50 and 200 MA recently formed a golden cross indicating a potential trend shift. The RSI is at 46 and the MACD is bullish.
As for the fundamentals, SOFI’s positive earnings in January triggered a run up to the $7.59 resistance, but the stock dropped to the $5.32 support due to profit taking and the banking crisis.
SOFI stock saw some positive momentum following its announced acquisition of Wyndham Capital Mortgage and is scheduled to release its Q1 2023 earnings on May 1st. It’s upcoming earnings and the Supreme Court’s expected ruling in June are important catalysts for SOFI stock.
SOFI Stock & ALLY Stock Forecast
ALLY is an established competitor to SOFI, and Buffett’s investment in the FinTech stock is only another sign of its fundamental strength. Considering that ALLY is already a profitable FinTech company that has been publicly listed since 2014, its drop to IPO prices could be a good opportunity for long-term investors. On the other hand, the SOFI stock forecast largely depends on the Supreme Court’s expected ruling in June which will be a strong catalyst either negatively or positively.
Overall, the FinTech industry is expected to grow significantly in the coming years. This growth was partially catalyzed by the pandemic which increased adoption of contactless payments and services. In 2022 the global fintech market was worth roughly $194.1 billion, but is expected to reach $492.81 billion by 2028. The FinTech industry will also benefit from innovations in AI and machine learning since these technologies are used to develop new financial products and services for their customers. Integrating AI helps fintech companies analyze data and automate services for greater efficiency. While both SOFI stock and ALLY stock have their own pros and cons, investors bullish on the fintech industry may also consider NU Holdings Ltd. (NYSE: NU) – another Warren Buffett favorite.
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