Better buy in 2023: SoFi or Nu Holdings?

The financial super app SoFi technologies (SOFI -1.61%) and the Brazilian Digital Bank Now Holdings (NOW 1.24%) have been two of the most anticipated and watched fintech companies to hit the public markets in recent years.

Both initially saw rapid growth in their respective markets. And both are navigating choppy markets this year after their valuations rose in 2021 and as investors focused more on a viable path to profitability.

Next year is clouded with uncertainty and who knows what market conditions will be like, but let’s take a look at which of these high-profile fintech companies will be a better buy in 2023.

SoFi: A one-stop shop

After going public through a special purpose vehicle acquisition company (SPAC) in 2021, SoFi soared to a huge valuation like many tech stocks before falling more than 70% this year amid high inflation and rising interest rates.

The company seeks to serve all the financial needs of high income earners. Currently, SoFi offers bank accounts, online investment opportunities (including crypto), credit cards, personal financial management tools, and a variety of lending products, including mortgages, student loan refinancing, and personal loans.

In recent years, SoFi has been dogged by the student loan moratorium, which has really cut into the student loan business, previously the largest lending segment. However, the company ramped up its personal loan business to offset the fight, and student loan payments on federal loans are expected to resume on June 30 of next year after the Biden administration once again extended the moratorium. So eventually business should resume a more normal pace.

SoFi has also made several large purchases in recent years to create a technology company. The first was Galileo, which helps companies with various payment options such as account setup, account financing and direct deposit. Through its customers, Galileo had 124 million accounts at the end of the third quarter. Recently, SoFi acquired cloud core processing company Technisys, which offers banks and fintech companies a more modern, multi-product technology operating system.

SoFi now has 4.74 million customers. It estimates annual revenue this year of as much as $1.52 billion and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of up to $120 million.

Nu Holdings: A disruptor in Latin America

Backed by Warren Buffett’s company Berkshire HathawayNu went public at a whopping $41 billion and is trading down more than 55% this year.

But Nu continues to create incredible growth. At the end of the third quarter, it had an astonishing 70 million customers and currently banks about 39% of the adult Brazilian population. And it does this with an industry-leading customer acquisition cost of just $6.

The company found a good product-market fit by offering customers low-fee banking products wrapped in an elegant digital experience. Millions of customers have opened their first bank accounts or received their first credit cards from the company.

Due to the nature of the company, Nu’s monthly average revenue per active customer (ARPAC) of $7.90 is nowhere near as high as existing banks in Brazil, which can range from $33 to $54. But the company is making progress, with some of Nu’s most mature customer cohorts generating ARPACs of $22, and management sees plenty of opportunity for ARPAC expansion going forward.

Nu also seems to be doing a good job of balancing growth with profitability. In the third quarter, Nu generated a small profit of $7.8 million on revenue of more than $1.3 billion. Furthermore, Nu is already seeing rapid growth in other Latin American countries such as Mexico and Colombia, where they have around 3.5 million customers and are already the number 1 credit card issuer in both of these countries.

Which is the best buy?

While both SoFi and Nu are likely to profit if rate hikes flatten out and there isn’t a severe global recession next year, I think Nu is the better long-term buy.

I’m certainly interested in the potential of SoFi’s technology business with Galileo and Technisys, but Nu’s growth is absolutely explosive. The management also shows a clear path to profitability, and in the 3rd quarter Nu had an efficiency ratio of 55%, which shows costs as a percentage of revenues. The lower the efficiency ratio the better, and an efficiency ratio below 60% is very good for Nu at this point.

Nu management has also said that at this early stage, growth in Mexico and Colombia is even faster than what they saw in the Brazil business at the same time. So growth is explosive, management seems aware of profitability, and today’s valuation gives investors the opportunity to get in cheaper than Buffett and Berkshire did.