SoFi Vs Robinhood Stock: Which Is Best?

Digital technology has succeeded in achieving a goal once thought to be impossible: the democratization of financial services. Twenty years ago, it was inconceivable that an average person could learn the ins and outs of investing, then execute $0 commission trades without hundreds of thousands of dollars in the bank.

Today, fintech disruptors have transformed financial services so that borrowing, investing, and digital management of everyday banking transactions is accessible to everyone. 

Two of the most exciting fintech disruptors began trading publicly in the summer of 2021, and investors are keeping a close watch on their progress. While both are in the digital financial services space, the two have a slightly different product lineup.

The market wants to know which is most attractive to consumers and which company’s stock will see the most impressive growth in coming months and years. In other words, when it comes to SoFi vs. Robinhood stock, which is best?

The Bull Case For SoFi

SoFi (SOFI) does a little of everything, from student loans to savings and investment accounts. Services like financial education, credit score monitoring, and budgeting are carefully designed to deliver an easy, stress-free user experience. More importantly, all of SoFi’s products can be accessed through mobile devices. 

SoFi (SOFI) boasts more than 2.9 million members who currently hold $100+ million in SoFi accounts. The platform has facilitated the funding of at least $59 billion in loans, and members have paid off in excess of $22 billion in debt with SoFi’s debt management tools. 

SoFi stock is down approximately 33 percent from its highs, but it is up nearly 46 percent since its inception roughly a year ago. When third-quarter 2021 results were announced, investors and analysts were impressed. Among other pieces of positive news, the company reported that current members are expanding their relationship, and new members are joining at a rapid rate. All in all, it appears the company is well-positioned to become an industry leader. 

Highlights of the earnings report include 28 percent year-over-year growth in net revenue – a total of $277 million. This is a new quarterly revenue record for SoFi, which indicates the company is heading in the right direction. 

The key to SoFi’s growth strategy is reinvesting in the business, and the company’s priority is developing a full suite of complementary products and services. Examples of relatively uncommon options available to SoFi users include IPO investing and cryptocurrency trading. If all goes according to plan, SoFi will eventually offer an all-in-one financial services platform, which is exactly what today’s consumers want. 

This strategy is working in that it is bringing new members on board at a rapid rate. Quarter-over-quarter, SoFi’s total user base increased from 2.6 million to 2.9 million. Once enrolled, these members tend to participate in multiple services, as evidenced by the fact that 4.3 million products are currently being used by SoFi’s 2.9 million-member user base. 

Analysts were particularly interested in the fact that the number of products in use grew faster than the number of members. This indicates that once enrolled, SoFi users are satisfied with the company and its services, and they are open to expanding the relationship. 

When coupled with the fact that SoFi’s original lending business was responsible for 80 percent of revenue in 2020 and only 75 percent of 2021’s revenue through the third quarter, it is clear that SoFi is successfully transforming itself from a non-traditional lender to a full-service financial platform. This makes a persuasive bull case for SoFi. 

The Bear Case For SoFi

As with any emerging business, the financial picture isn’t entirely positive. Though SoFi broke its own record for net revenue, that was almost entirely the result of growth in personal loans and home loans.

Student loan volume was down significantly, due in part to the moratorium on federal student loan payments. It is unclear how the expiration of this moratorium will be managed by borrowers. That’s problematic for SoFi because its growth strategy depends on its signature student loan products. 

In addition, SoFi (SOFI) is not yet showing a profit. For third-quarter 2021, the company reported a GAAP net loss of $30 million. The good news is that the $30 million loss is a year-over-year improvement. During the same period in 2020, the company saw a loss of $42.9 million. 

If SoFi is able to deepen relationships with its current members while simultaneously attracting new ones, it may achieve profitability sooner rather than later. However, that’s a big if, and some analysts say that the risks don’t offset the potential rewards. They suggest it is better to wait before buying to confirm that SoFi will continue trending in the right direction. 

That confirmation may come in early 2022 when SoFi hopes to have its bank charter approved. If this occurs as planned, SoFi will be able to expand its product line and access lower rates. Together, those advantages have the potential to push the company’s total revenue up by 10 percent or more in the 12 months that follow, which would quash the bear case for SoFi.

Why Buy Robinhood Stock?

They say that there is no such thing as bad press, but the executive team at Robinhood might beg to differ. In the first quarter of 2021, Robinhood got a lot of negative attention for its handling of retail traders anxious to buy GameStop (GME) stock. 

The fallout from that debacle was so bad that a Congressional committee held hearings, and Robinhood’s CEO had to respond to questions like, “Don’t you see and agree that something very wrong happened here? And that you are at the center of it?”

The scandal called Robinhood’s future as a publicly-traded company into question for a time, but the outrage fizzled within a few weeks. That left Robinhood free to hold its IPO on July 29, 2021. 

So far, Robinhood stock hasn’t performed particularly well. It is down nearly 42 percent from recent highs and almost three percent since it launched. Nonetheless, some analysts say there is a solid case for adding Robinhood stock to a well-diversified portfolio. 

That case is centered around the company’s ability to attract and retain young retail investors. Its client base includes many traders who are just starting out, and thanks to Robinhood’s low-or-no cost-trading fee schedule, it is a popular choice for college students. 

In 2014, Robinhood had just 500,000 users. Today, that number is more than 22.5 million. The most recent earnings report included revenue of almost 365 million, which represents year-over-year growth of approximately 35 percent. 

Robinhood Payment For Order Flow: Major Risk

The bad news is that in the third quarter of 2021, Robinhood erased all of the gains it achieved in the second quarter and then some. Revenue missed its target by 16.6 percent, and earnings per share missed its target by 177 percent. The total net loss was $1.32 billion – a large increase from the $11 million loss reported for third-quarter 2020. 

There are a number of reasons for Robinhood’s growing losses, beginning with its business model. Rather than generating revenue from its users, Robinhood relies on payment for order flow (PFOF). In a nutshell, that means Robinhood receives payment for routing its customers’ orders to third parties. 

The trouble with relying on PFOF is – among other things – that regulators are considering doing away with the practice. Considering these payments make up 78 percent of Robinhood’s total revenue, buying Robinhood stock looks like a high-risk move. 

Adding to the list of risks of investing in Robinhood is the fact that Robinhood is heavily reliant on cryptocurrency trades. That wouldn’t necessarily be a problem, except that most cryptocurrency trades made through Robinhood involve Dogecoin – a memecoin that is unlikely to become a major player in crypto markets. 

Finally, Robinhood had a serious data breach in November 2021 that impacted seven million users. Given the nature of its business, this incident is likely to shake the confidence of users who have plenty of alternative platforms to choose from. Collectively, the risks of investing in Robinhood appear to outweigh the rewards.

SoFi vs. Robinhood Stock: Conclusion

SoFi might not have the same brand recognition that Robinhood enjoys, but it is much stronger in all of the areas that matter.

SoFi has a well-considered strategy that it has been able to execute successfully, and it is growing revenue and shrinking losses along the way. Robinhood, on the other hand, appears to be going in the opposite direction. 

The SoFi platform has nearly all of the features offered by Robinhood, along with a lengthy list of additional tools, services, and resources that Robinhood has no plans to develop.

When the strategy, product lineup, and results-to-date are considered, there is a clear answer to the question, “SoFi vs. Robinhood Stock: Which is best?” SoFi stock is a far better option for investors who want to include fintech in their portfolios today. 

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