Discover Financial Services digital banking and payment company (DFS), which is based at Riverwoods, Illinois, 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. By comparison, San Francisco-based SoFi Technologies, Inc. (SOFI) is a financial company that operates an online platform to provide financial services. It offers student loan refinances, private student loans, personal loans, auto loan refinances, home loans, mortgages, and investments.
One of the hardest hit sectors last year was the personal lending industry as the near zero interest rate environment and the COVID-19 pandemic weighed on lender incomes. However, the Federal Reserve recently ramped up its monthly bond purchases and reported three rate hikes in 2022, which should be a boon for the personal lending industry. Rising discretionary spending is also expected to boost industry growth. In addition, the personal loan industry is expected to grow by integrating advanced technologies into business operations over the coming months. According to a report by Allied Market Research, the global personal loan market is expected to grow at a 31.7% CAGR between 2021 and 2030. Therefore, we believe that DFS and SOFI should benefit.
DFS stock has gained 28.2% year-to-date, while SOFI has returned 19.4%. Additionally, DFS’s 31.5% gains over the past year are significantly higher than SOFI’s 17.3% returns. Additionally, DFS is the clear winner with price gains of 19.7% over SOFI’s negative performance returns of the past nine months.
But which of these two titles is the best buy now? Let’s find out.
On October 20, Roger Hochschild, CEO and President of DFS, said: âEven in an environment of heightened competition, our compelling value proposition generated strong growth in new accounts, which helped our return to growth in new accounts. loans from year to year within the quarter. In addition, our success in managing our operating costs and our continued strong credit performance helped generate substantial capital, supporting the increase in share buybacks.
On November 10, Anthony Noto, CEO of SOFI, said: âThe third quarter of 2021 capped a one-year sprint of milestones, and we now have more flexibility than ever to execute and fund our strategic growth plans. in the long term and position SoFi as the âMost Whatever Winnerâ in FinTech. “
Recent financial results
DFS ‘total revenue, net of interest expense, increased 2% year-on-year to $ 2.78 billion for the third quarter ended September 30, 2021. Its net profit increased 42% year-on-year to reach $ 1.09 billion. In addition, its EPS stood at $ 3.54, up 44% year-on-year.
SOFI’s adjusted net revenue increased 43.8% year-on-year to $ 277.19 million for the third quarter ended September 30, 2021. However, its net loss amounted to 30.05 million, up from $ 42.88 million in the previous year quarter. In addition, his loss per share was $ 0.05 compared to $ 0.70 in the period of the previous year.
Expected financial performance
Analysts expect DFS revenue to decline 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 rate of 55.6% per year over the next five years .
In comparison, SOFI’s revenues are expected to increase by 47.9% for the quarter ended June 30, 2022 and by 44.6% in fiscal 2022. Its EPS is expected to increase by 87.3% for the quarter ending. ending June 30, 2022 and 75% in fiscal 2022. Additionally, the company’s EPS is expected to grow at a rate of 47% per year over the next five years.
DFS’s revenue of $ 11.49 billion over the past 12 months is significantly higher than SOFI’s $ 867.87 million. DFS is also more profitable, with a gross margin of 95% compared to 72.3% for SOFI.
In addition, the respective ROE and ROA of 44.07% and 4.45% of DFS compare to the negative returns of SOFI.
In terms of 12-month rolling P / S, SOFI is currently trading at 5.31x, 73% higher than DFS’s 3.07x. In addition, SOFI’s 12-month rolling P / B ratio of 2.82x is higher than DFS’s 2.80x.
So, DFS is relatively affordable here.
DFS has an overall rating of B, which is equivalent to a purchase in our property POWR odds system. In contrast, SOFI has an overall D rating, which translates to Sell. POWR scores are calculated by considering 118 separate factors, each factor being weighted to an optimal degree.
DFS has a B rating for sentiment, which is in line with analysts’ expectations that its EPS will rise in the coming years. By comparison, SOFI has a C rating for Sentiment, which is in line with analysts’ expectations that its EPS will remain negative in the near term.
Additionally, DFS has a C rating for value, in line with its lead of 2.84x P / S , which is 16.3% lower than the industry average 3.39x. However, SOFI has an F rating for Value, which is in line with its P / S forward 11.97x, which is 253.4% ââabove the industry average 3.39x.
DFS has a C grade for quality. This is justified given that DFS’s 12-month rolling ROCE of 47.51%, which is 273.1% above the industry average of 13.73%, SOFI has a quality score of D , which is in line with its negative 12-month rolling ROCE, compared to the industry average of 12.73%.
Out of 54 actions in the Consumer financial services industry, DFS is ranked # 5. However, SOFI is ranked # 114 out of 122 stocks in the Financial Services (Business) industry.
Beyond what I stated above, we also evaluated stocks for growth, stability and momentum. Click here to view all DFS ratings. Also get all SOFI assessments here.
Rapid technological innovations and economic recovery are driving growth in the personal loan industry. While DFS and SOFI should benefit from the favorable industry backdrop, we believe it is best to bet on DFS now due to its lower valuation, higher profitability and strong financial position.
Our research shows that the chances of success increase when investing in stocks with an overall strong buy or buy rating. See all other top rated stocks in the consumer financial services industry here. As well, Click here to access all the top rated stocks in the financial services industry (business).
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%, compared to a 29.56% increase in the benchmark S&P 500 over the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal’s a passionate interest in the analysis and interpretation of 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 he takes while advising investors in his articles. Following…