The last Millennials and the first of Gen Z are coming of age, and these younger cohorts, raised in the digital world, are looking at the banking industry – and they want better service, which they define as better digital service. The result is the rise of digital finance companies, taking banking services out of brick-and-mortar into the virtual world, offering faster transactions and quicker financial decisions.
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Andrew Jeffrey, a fintech research analyst at William Blair who ranks amongst the top 2% of Wall Street stock experts, highlights how digital finance is meeting the needs of these younger demographics: “We believe that alternatives to traditional consumer finance and bank cards will gain momentum as younger demographics seek better, more transparent financial experiences. We submit that the best digital finance providers offer superior user experiences (UX) and more innovative financial products, compared with traditional banks. They also employ proprietary underwriting algorithms, enabling real-time credit decisions.”
Jeffrey further explains, “Our opinion is that traditional banks, cards, and consumer finance solutions struggle to keep pace with younger consumers’ desire for instant credit decisions, creative lending products, flexible payment options, and transparent disclosures.”
The 5-star analyst doesn’t stop there. He has picked out two digital financial stocks, SoFi Technologies (NASDAQ:SOFI) and Affirm (NASDAQ:AFRM), as the best of the bunch, and recommends that investors buy in. Let’s take a closer look at both, using data drawn from the TipRanks platform to get a sense of the broader Wall Street view of them.
SoFi Technologies
The first stock we’ll look at here, SoFi, gets its name from the niche it lives in – Social Finance. The company brings the experience of the online interactive world to the realm of digital banking, putting a new spin on fintech.
SoFi is based in San Francisco, near the heart of California’s Silicon Valley high-tech and start-up culture. While the company is licensed as a bank, and offers its customers an array of the usual banking services, Sofi does not have any physical presence – that is, no brick-and-mortar branches. Sofi’s services are accessible solely online, via laptops, tablets, or smartphones, through the website or the downloadable mobile app. The company markets itself towards the younger generation of banking customers, a customer base that is just starting out on financial independence.
To serve those customers, the company offers everything from banking, with checking and savings accounts, to personal loans, credit cards, mortgage loans, student loan refinancing, and even various investing and insurance products. The company now boasts over 10 million members, and in 2024 saw its customer base grow by 2.5 million. In the last five years, SoFi has seen its membership expand by more than 9 times.
SoFi boasts that its services give direct support to its members, putting them on the way to ‘getting their money right.’ The company states that, through September 30, 2024, its customers have paid down a cumulative $33 billion in credit card debt and borrowed a total of $117 billion for various purposes – including $9 billion in funded home loans and $44 billion refinanced student loans. Collectively, the company’s members have earned a total of $1 billion in savings interest.
Turning to the financial results, we find that SoFi generated $697 million in revenue in its last reported quarter, 3Q24. This was up 30% year-over-year, and beat the forecast by $63.32 million. On earnings, the company’s 5-cent GAAP EPS was a tremendous turnaround from the 29-cent EPS loss reported in 3Q23.
In his comments on the stock for William Blair, analyst Andrew Jeffrey takes note of SoFi’s idiosyncratic advantages, as well as its potential to expand its earnings going forward. He writes of the company, “The company is poised to take share from traditional financial institutions, in our opinion. Share gains will be driven by younger consumers seeking better UX; superior digital experiences; a full suite of investment advice, savings, spending, and investment solutions; and perhaps most importantly simple, real-time credit decisions.”
“Importantly,” Jeffrey goes on to add, “we think SoFi is undergoing a bullish business model transformation, which we see leading to higher-quality and more consistent financial results. As the company evolves into a capital-light, fee-based model, our expectation is that the stock’s valuation will expand, reflecting growing investor comfort with financial visibility, more transparent accounting, a growing capital cushion, and rising long-term profitability.”
These comments support Jeffrey’s Outperform (i.e., Buy) rating on SOFI stock, although as is customary for William Blair, Jeffrey offers no fixed price target. (To watch Jeffrey’s track record, click here)
That’s the bullish take but the consensus view is that SOFI is a Hold, a rating based on 6 Buys, 5 Holds, and 4 Sells. The shares are priced at $18.23 and recent share price gains have pushed the stock well above the average price target; at $13.19, the figure suggests a one-year downside of 27%. (See SOFI stock forecast)
Affirm Holdings
The second stock we’ll look at, Affirm Holdings, is another fintech with a unique customer-facing niche. Affirm’s specialty is facilitating digital payments; the company’s platform is optimized for the e-commerce world and provides financial services to both merchants and buyers.
Affirm gives its customers an account which provides multiple options for making payments when shopping at physical locations. These include the smartphone app and the Affirm debit card, which can be used as a credit card – but with a strict limit, established by the user up front as a debt limit. The whole system is designed to allow users to keep their spending within their budget.
The other key feature of Affirm’s service, for users, is transparency. Affirm does not charge its users (the shoppers) a fee for services. Payments on purchases can be set by arrangement, with terms defined in advance. While Affirm does charge interest, the company generates most of its revenues through vendor commissions. While this may sound lopsided, in favor of the spender, there is a key advantage for merchants here: they always know that a payment made through Affirm will clear.
All of this has made Affirm the leading fintech in the ‘buy now, pay later’ niche. The company has leveraged its position into active partnerships with some of the world’s leading retailers – Walmart, Amazon, Target, and Lowes, to name a few.
And that, in turn, has led to solid results. Affirm’s revenue in its last reported quarter, fiscal 1Q25, came to $698.5 million, up 41% year-over-year and some $34.5 million ahead of the forecast. The company ran a loss at the bottom line – the GAAP EPS was negative 31 cents – but that was 3 cents better than had been expected and an improvement over the 57-cent EPS loss reported in fiscal 1Q24.
Top-ranked analyst Jeffrey likes this stock, and among its strengths he points out the quality technical base, the strong merchant base, and the overall business model. Specifically, Jeffrey writes, “Our view is that Affirm is the best-positioned BNPL provider in a large, growing industry. Although several BNPL companies appear similar, we believe Affirm is differentiated by its: 1) superior technology integrations; 2) enterprise merchant relationships, including Apple, Shopify, Walmart, and Amazon; 3) industry-best underwriting; 4) proven and resilient liquidity; and 5) compelling unit economics. We anticipate that these attributes will enable the company to take meaningful share in e-commerce and at the physical point of sale (POS).”
Looking ahead, the analyst lays out a clear recommendation: “We recommend that long-term growth investors build positions… Our view is that the company’s early strength in the large, growing BNPL TAM; leading technology integrations; enterprise customer exposure; and burgeoning Affirm Card GMV growth position Affirm for mid- to high-teens-plus 10-year compounded organic revenue growth.”
This comes down to an Outperform (i.e. Buy) rating for the stock from Jeffrey.
This stock holds a Moderate Buy consensus rating, based on 18 reviews that include 12 Buys and 6 Holds. The shares are priced at $56.76 and the average price target, of $68.69, implies a one-year gain of 21%. (See AFRM stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
