It's been a hot couple of weeks for the fintech sector. Digital banking platform Chime Financial (CHYM 0.38%) and stablecoin operator Circle (CRCL 5.47%) both completed initial public offerings (IPOs) in which shares of both companies soared.
While artificial intelligence (AI) is still the biggest megatrend fueling the stock market right now, the back-to-back IPOs from Circle and Chime have brought some renewed interest to the financial services arena.
Given the overlapping business models of Chime and SoFi Technologies (SOFI 2.18%), another budding neobank, investors may be wondering which stock is the better buy right now.
Let's assess Chime and SoFi from both an operational and valuation perspective. After doing so, I think smart investors will be able to determine a clear winner between the two digital banking platforms.
NASDAQ: SOFI
Key Data Points
SoFi is experiencing some monster growth, but...
SoFi offers many of the same financial services products that you may see at traditional banks. By offering lending, insurance, and investment management, SoFi has proven that it can compete with legacy banking providers by offering a similar, diversified portfolio of products. The main differentiator between SoFi and most of its competitors is that the company operates entirely online and lacks physical brick-and-mortar infrastructure.
By creating a one-stop shop for financial services, SoFi is offering a level of convenience that is hard to match. In turn, SoFi is not only able to keep its customers loyal to the platform, but also has leveraged its comprehensive ecosystem by cross-selling additional services to existing members.
SoFi refers to this strategy as its financial services productivity loop -- essentially building a model in which the lifetime value of customers increases over time, ultimately creating a competitive advantage over incumbent providers.
At the end of the first quarter, SoFi boasted 10.9 million customers on its platform that use a total of 15.9 million products. This implies that each user in SoFi's network is using 1.4 products on average.
SOFI Revenue (TTM) data by YCharts.
As the chart above illustrates, SoFi's business model is paying off in spades, underscored by accelerating revenue growth and a transition to consistent profitability.
While SoFi's business is rocking, Chime doesn't appear too far behind.
Image source: Getty Images.
... Chime should not be slept on
In the table below, I've summarized a number of financial metrics and key performance indicators for SoFi and Chime.
| Category | SoFi | Chime |
|---|---|---|
| Revenue -- Trailing 12-month ($) | $2.8 billion | $1.8 billion |
| Members | 10.9 million | 8.6 million |
| 3-year membership compound annual growth rate (CAGR) | 41.3% | 22.3% |
| Net income (Trailing 12-Months) | $482 million | ($28.3) million |
| Market capitalization (as of June 18) | $17 billion | $10.6 billion |
Data source: SoFi Investor Relations and Chime S-1 Filing.
The obvious takeaway from the figures above is that SoFi is a larger business than Chime in terms of revenue. This is not entirely surprising, given that SoFi's platform boasts more than 2 million more members than Chime.
The more subtle factor that I'd like to point out is that SoFi is far more profitable than Chime. Perhaps the biggest contributor to SoFi's profitability profile is the rate at which it is acquiring new members relative to the competition. Per the table above, SoFi's three-year compound annual growth rate (CAGR) for user acquisition is almost double that of Chime's.
By onboarding more users, SoFi has been able to more quickly monetize these members and command superior unit economics compared to its peers.
What's the verdict?
While Chime's growth is impressive, the company lags behind SoFi on a number of critical metrics. While I suspect that Chime may see a brief uptick in its operations thanks to the notoriety that came with the IPO, I question if the company will ever eclipse SoFi's size.
Although SoFi is a bit pricey compared to traditional bank and financial services stocks based on its price-to-earnings (P/E) ratio, I think the shares deserve a premium due to the company's technology-first platform. I see SoFi growing into its valuation thanks to future earnings growth.
SOFI PE Ratio data by YCharts.
If I had to choose between the two digital bank stocks explored here, I'd pick SoFi without thinking twice.
