SoFi vs. Discover Financial Services: Which Personal Loan Stock is a Better Buy?

Digital banking and payment services company Discover Financial Services (DFS), which is based in Riverwoods, Ill., operates in two segments: Digital Banking and Payment Services. While the Digital Banking segment offers Discover-branded credit cards, the Payment Services segment operates the PULSE network. In comparison, San Francisco-based SoFi Technologies, Inc. (SOFI) is a finance company that operates an online platform to provide financial services. It offers student loan refinancing, private student loans, personal loans, auto loan refinance, home loans, mortgage loans, and investments.

Last year, the personal loans space was one of the hardest-hit industries as the near-zero interest rate environment and the COVID-19 pandemic depressed lenders' revenues. However, the Federal Reserve recently accelerated the reduction of its monthly bond purchases and signaled three rate hikes in 2022, which should be a boon for the personal loans sector. Rising discretionary spending should also drive the industry’s growth. Furthermore, the personal loan industry is expected to grow by integrating advanced technologies in business operations in the coming months. According to an Allied Market Research report, the global personal-loans market is expected to grow at a 31.7% CAGR between 2021 - 2030. Therefore, we think both DFS and SOFI should benefit.

DFS’ stock has gained 28.2% in price year-to-date, while SOFI has returned 19.4%. Also, DFS’ 31.5% gains over the past year are significantly higher than SOFI’s 17.3% returns. Furthermore, DFS is the clear winner with 19.7% price gains versus SOFI’s negative returns in terms of the past nine months’ performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Oct. 20, Roger Hochschild, CEO and President of DFS, said, "Even in an environment of heightened competition, our attractive value proposition drove strong new account growth, which contributed to our return to year-over-year loan growth in the quarter. Further, our success in managing our operating costs and continued strong credit performance helped generate substantial capital, supporting the increase in share repurchases."

On Nov. 10, Anthony Noto, CEO of SOFI, said, “The third quarter of 2021 capped a year-long sprint of great milestones, and we now have more flexibility than ever to execute and fund our long-term strategic growth plans and position SoFi as the 'winner takes most' in financial technology.”

Recent Financial Results

DFS’ total revenue net of interest expense increased 2% year-over-year to $2.78 billion for the third quarter, ended September 30, 2021. Its net income grew 42% year-over-year to $1.09 billion. Also, its EPS came in at $3.54, up 44% year-over-year.

SOFI’s adjusted net revenue increased 43.8% year-over-year to $277.19 million for the third quarter, ended September 30, 2021. However, its net loss came in at $30.05 million compared to $42.88 million in the prior-year quarter. Also, its loss per share was  $0.05 versus  $0.70 in the year-ago period.

Expected Financial Performance

Analysts expect DFS’ revenue to decrease 15.2% for the quarter ending June 30, 2022 but increase 1.1% in fiscal 2021. The company’s EPS is expected to decline 36.9% for the quarter ending June 30, 2022, and 23.8% in fiscal 2021. However, its EPS is expected to grow at a 55.6% rate per annum over the next five years.

In comparison, SOFI’s revenue is expected to increase 47.9% for the quarter ending June 30, 2022, and 44.6% in fiscal 2022. Its EPS is expected to grow 87.3% for the quarter ending June 30, 2022, and 75% in fiscal 2022. Also, the company’s EPS is expected to grow at a 47% rate per annum over the next five years.

Profitability

DFS’ $11.49 billion trailing-12-month revenue is significantly higher than SOFI’s $867.87 million. DFS is also more profitable, with a 95% gross profit margin versus SOFI’s 72.3%.

Furthermore, DFS’ 44.07% and 4.45% respective ROE and ROA compare with SOFI’s negative returns.

Valuation

In terms of trailing-12-month P/S, SOFI is currently trading at 5.31x, which is 73% higher than DFS’ 3.07x. Also, SOFI’s 2.82x trailing-12-month P/B ratio is higher than DFS’s 2.80x.

So, DFS is relatively affordable here.

POWR Ratings

DFS has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, SOFI has an overall D rating, which translates to Sell. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

DFS has a B grade for Sentiment, which is consistent with analysts’ expectations that its EPS will increase in the coming years. In comparison, SOFI has a C grade for Sentiment, which is in sync with analysts’ expectations that its EPS will remain negative in the near term.

Also, DFS has a C grade for Value, consistent with its 2.84x forward P/S , which is 16.3% lower than the 3.39x industry average. However, SOFI has an F grade for Value, which is in sync with its 11.97x forward P/S , which is 253.4% higher than the 3.39x industry average.

DFS has a C grade for Quality. This is justified given DFS' 47.51% trailing-12-month ROCE, which is 273.1% higher than the 13.73% industry average  SOFI has a Quality grade of D, which is in sync with its negative trailing-12-month ROCE, compared to the 12.73% industry average.

Of 54 stocks in the Consumer Financial Services industry, DFS is ranked #5. However, SOFI is ranked #114 of 122 stocks in the Financial Services (Enterprise) industry.

Beyond what I have stated above, we have also rated the stocks for Growth, Stability, and Momentum. Click here to view all the DFS ratings. Also, get all the SOFI ratings here.

The Winner

Rapid technological innovations and the recovering economy are driving the growth of the personal loan sector. While both DFS and SOFI are expected to benefit from the favorable industry backdrop, we think it is better to bet on DFS now because of its lower valuation, higher profitability, and robust financials.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Consumer Financial Services industry here. Also, click here to access all the top-rated stocks in the Financial Services (Enterprise) industry.

DFS shares were trading at $116.35 per share on Thursday afternoon, up $0.58 (+0.50%). Year-to-date, DFS has gained 30.67%, versus a 29.56% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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