To The Moon

$SoFi Technologies Inc.(SOFI)$ $Affirm Holdings, Inc.(AFRM)$

Which stock is Better: SoFi Technologies or Affirm Holdings?

Which one do I consider a better investment at current prices? This article addresses that exact question, so thank you for reading this! I’ll compare these two fintech companies across key metrics: revenue, profitability, return on invested capital, valuation using forward price-to-sales ratios, and my discounted cash flow (DCF) valuation models. Let’s dive in.

Revenue Comparison

Looking at trailing 12-month revenue, both companies show nearly identical figures and trends. Affirm generated $2.5 billion, while SoFi Technologies reached $2.48 billion. However, their business models differ significantly.

SoFi is a more diversified operation, generating revenue from lending across personal loans, home loans, and student loans, as well as offering financial services and technology solutions. This diversification reduces its dependence on lending alone, which makes its business model less risky.

Affirm, on the other hand, focuses primarily on the "buy now, pay later" (BNPL) market. While this narrow focus can be a strength, it also comes with inherent risks tied to the BNPL market's dynamics.

Lending Market Risks and Opportunities

Both companies are in the riskiest segment of the lending market—unsecured loans with minimal collateral. Unlike car or home loans, these loans can't be easily recovered in case of default.

Lenders are currently optimistic because of a strong economy, low unemployment, and high consumer spending. However, if the economy falters, this optimism can quickly turn into caution. A rise in unemployment or an economic downturn could dry up the lending market, increasing default risks.

SoFi's bank charter allows it to use customer deposits to fund loans, offering a more stable funding source. Affirm, however, depends on external investors for capital. This dependence makes Affirm more vulnerable to shifts in investor sentiment if the lending market contracts.

Profitability and Cash Flow

SoFi has achieved profitability with $214 million in trailing 12-month net income, while Affirm, though improving, remains unprofitable with a $446 million net loss.

When examining cash flow from operations as a percentage of sales, Affirm is positive at 2.71%, whereas SoFi is at -47%. However, interpreting cash flow metrics for lending companies is complex due to differing accounting treatments for loans they retain versus those they sell.

SoFi’s diversified funding sources give it an advantage, making it less reliant on external markets compared to Affirm.

Free Cash Flow

Affirm

• Recent Trends: Affirm has shown positive cash flow from operations, currently at 2.71% of sales. However, its Free Cash Flow fluctuates significantly due to its heavy reliance on external funding to originate loans.

• Key Insight: Affirm’s BNPL model involves originating loans, which are often sold to external investors. While this creates immediate liquidity, its dependency on external funding means cash flow can be volatile, particularly in challenging economic conditions.

• Strengths: Affirm’s ability to generate positive operating cash flow signals improving operational efficiency.

• Risks: If the market for securitizing and selling loans contracts, Affirm’s Free Cash Flow could face significant headwinds.

SoFi

• Recent Trends: SoFi has a negative Free Cash Flow currently (-47% of sales from cash flow from operations). This is partially because of its strategy to retain many of the loans it originates on its balance sheet rather than selling them, requiring significant capital investment.

• Key Insight: SoFi’s bank charter allows it to use customer deposits as a funding source for loans. While this improves stability and reduces dependence on external capital, it also ties up cash, affecting Free Cash Flow.

• Strengths: SoFi’s diversification into financial services and technology businesses offers additional revenue streams that could improve cash flow over time.

• Risks: Negative FCF can be a concern if it persists, especially in an economic downturn when liquidity is crucial.

Affirm has the advantage of positive Free Cash Flow, but its reliance on external funding makes it more vulnerable during economic downturns.

Valuation Comparison

On a forward price-to-sales basis, Affirm is slightly more expensive at 5x compared to SoFi’s 4.5x. Both stocks have followed similar valuation trends, rising and falling in tandem as they’re exposed to the same end markets.

My DCF valuations show that both stocks are meaningfully undervalued. Affirm’s intrinsic value per share is $81, compared to its current market price of $60. For SoFi, the intrinsic value is $21.30, while the market price is $14.60. Both offer attractive upside potential based on these metrics.

Conclusion

While I consider both SoFi and Affirm strong buy opportunities, if I had to choose one, I’d pick Affirm. Its growth prospects, particularly in supporting both sides of BNPL transactions, give it an edge. Merchants benefit from increased sales facilitated by BNPL options, creating a compelling qualitative advantage for Affirm.

That said, both companies are positioned well in the fintech space, and I’m optimistic about their long-term potential.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub