SoFi vs. Ally Financial: Why 1 is a Buffett stock and the other is not

In the first quarter of the year, Warren Buffett and his company Berkshire Hathaway (BRK.A 0.10%) (BRK.B -0.03%) opened a position in the large consumer digital bank Allied Financial (ALLY 0.03%). It wasn’t a huge investment for Berkshire, but the move is interesting because Ally isn’t just a bank, but it’s also a branchless digital bank. It’s also worth noting that Ally’s business, while heavily focused on the automotive space, is quite similar to popular fintech, Sofi Technologies (SOFI -3.35%)which is also a consumer digital bank.

So what makes Ally a Buffett stock versus SoFi? We’ll take a look.

Image source: Motley Fool.

SoFi vs. Ally

Many investors are now familiar with SoFi’s business and it has been very popular since its IPO in late 2020, although the stock, like many other fintech companies, has not fared well. SoFi’s goal is to become a one-stop-shop for high-income earners and meet all of their financial needs. The company offers bank accounts, online investments, and various loan products such as mortgages, credit cards, and personal and student loans. SoFi has over $12 billion in assets and approximately 3.9 million members. SoFi also has a banking technology business with its acquisitions of Galileo and Technisys.

SoFi flywheel.

Image source: SoFi.

Ally offers a similar proposition, but while SoFi specializes in student loans, Ally specializes in auto loans. Nevertheless, the company also wants to serve the customer in many other ways and offers bank accounts, mortgages, credit cards, point-of-sale loans, insurance, and online investments. Ally also has a commercial lending business, in which it serves car dealerships. Ally has been around longer and is significantly larger than SoFi, with 10.5 million customers and over $184 billion in total assets.

Ally Financial Business Proposal.

Image source: Ally Financial.

Capital valuation and return

I’m sure there are many, many factors Buffett and Berkshire consider before investing in a stock, but two things that make Ally more like a Buffett investment than SoFi are its valuation and its large capital return programs. Buffett has long been a value investor who tries to find stocks trading below their intrinsic value.

Table of ALLY price to tangible book value

ALLY Price to Tangible Book Value data by YCharts.

Ally shares are trading just above tangible book value, or its net worth, and below five times forward earnings, both of which are cheap. SoFi is trading above 240% of its tangible book value and 71 times its forecast 2022 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), both of which are expensive growth valuations. Ally is also coming off an extremely profitable year in which it generated a return of over 24% on tangible equity, which was certainly high, but the company is anticipating much better returns going forward than it generated before the pandemic.

Plus, we know that Buffett likes companies that return capital to shareholders through stock buybacks and dividends. Ally ticks both of these boxes while SoFi, which is again much earlier in its journey, does not yet offer a dividend or share buyback. At current trading levels, Ally has a strong annual dividend yield of 2.85%. The company has also repurchased a ton of shares since its IPO and plans to execute a $2 billion buyback plan this year.

Ally Share is buying.

Image source: Ally Financial.

Ally’s Lessons

In fact, I can’t say for sure that Buffett was the one who pulled the trigger on Ally – it could have been one of his investment lieutenants. Ally is also very consumer-facing, so a recession would likely be bad for her business. But Buffett is very knowledgeable about banking and also quite familiar with the automotive industry, having owned General Motors stock for several years. Ally is from General Motors.

But what makes Ally a Buffett stock is undoubtedly its cheap valuation and strong capital return program. SoFi is still early in its business, has a much higher valuation, and is not yet making a return on capital. Berkshire has been known to invest in previously unprofitable fintech companies, but that’s usually in countries outside of the United States, where they can be much bigger disruptors and have much bigger market opportunities. I think SoFi still has a long way to go before it becomes a traditional Buffett stock.

About Mary Moser

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