Better Buy: SoFi vs. Charles Schwab
With nothing more than a passing glance, the two companies look pretty similar. brokerage firm Charles Schwab (SCHW 2.07% ) has been around for much longer and has spread to other areas like banking and lending. Sofi Technologies ( SOFI -3.08% ) may be younger and founded in the student loan business, but it has also ventured into banking and brokerage. Both companies specialize in online self-service customer service. And both stocks more or less offer shareholders the potential for a reward commensurate with their risk.
If there is only room for one new financial security in your portfolio, which one should you choose?
A closer look at everyone
If you’re an investment news reader, you probably know Charles Schwab.
Founded in 1975 as the discount broker most investors know today, Schwab launched the idea of online trading largely in 1996. Since then, it has branched out into traditional banking services like mortgages and checking accounts, and it has $7.7 trillion in assets thanks to its continued growth.
SoFi Technologies arrived at the same goal by taking a different path. SoFi – short for Social Finance – was launched in 2011 as a lender to students and recent graduates, helping them manage and refinance their debt. In the meantime, it has moved into other areas, such as adding crypto investments in 2019 and launching verification and savings services just a few weeks ago. It’s still only a fraction of Schwab’s size, but considering his age, that’s as it should be. He also grows faster than Schwab, which, given his small size, is also normal. its historical comparisons are at much lower levels.
The question remains though: which is the best buy?
SoFi vs. Schwab
Charles Schwab is clearly the safer bet, but he offers less growth potential. SoFi Technologies is growing faster, but is currently not profitable and will likely remain so for a long time. It’s the compromise. Potential buyers of either must determine their own risk tolerance, then weigh each company’s unique risks against its particular rewards. Not all investors will necessarily come to the same conclusion.
Overall, however, most investors would be better off owning Schwab than SoFi, for several different reasons.
One such reason is the impending rise in interest rates. Although not set in stone, the Federal Reserve’s Open Market Committee tentatively forecasts up to 10 quarter-point increases in the federal funds rate by the end of 2024 in its efforts to curb what has become runaway inflation. While higher interest rates generally make lending more profitable, it may also cause much of SoFi’s lending business to dry up as consumers balk at higher borrowing costs.
Non-traditional lenders like SoFi have never been tested in a rising rate environment like the one we’re about to see, and more than that, they’ve never been tested in a recession that Moody’s said has a 1 in 3 chance of taking shape sooner rather than later. Indeed, SoFi could find itself undercapitalized and losing customers in such an environment. It also carries nearly $6.1 billion in loans on its books, which are now stable and performing, but have never been tested in a true recessionary environment.
In that vein, it’s worth noting that the average credit score of SoFi’s home loan and personal loan customers fell about 10 points between 2020 and 2021. And, oddly enough, while that’s not As a company-specific measure, Black Knight reports that for the first time in nine months, February mortgage delinquencies rose. Also keep in mind that the student loan forbearance put in place during the pandemic is not over yet. If/when it does at the end of August, student loan defaults could skyrocket.
Nor the potential problems Schwab faces. It’s not in the student loan business, and it requires its mortgage lender customers to Rocket Mortgageavoiding the risk of managing a loan portfolio that could soon begin to deteriorate.
The other reason Charles Schwab is a better buy than SoFi Technologies right now? It’s a much more established (and profitable) company that’s growing faster than you might think. While still not growing at the same pace as SoFi, analysts expect Schwab’s revenue to swell more than 11% this year and accelerate to a 15% pace next year. This is far from the lukewarm growth that the other pillars of finance are currently experiencing. The analyst community also predicts continued and steady earnings growth that outpaces revenue growth through 2026.
Safer is smarter, for the most part
If you fully understand the risks of owning SoFi and understand how the economic environment is about to change its risk versus reward profile, go for it. You could be well rewarded for your audacity.
For most investors, however, Charles Schwab is the smartest overall play. He survived whatever the foreseeable future holds. And, its bank and brokerage accounts are – in general – larger and held by customers more likely to stay put and weather economic storms rather than jump ship at the first sign of trouble. Again, we just don’t know if the same can be said of SoFi.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.