Better Fintech Stock: Robinhood vs. SoFi Technologies

Key Points

• Robinhood continues to draw more investors into its growing ecosystem.

• SoFi's headwinds -- including a freeze on student loan payments -- are dissipating.

• One of these stocks is more reasonably valued relative to its growth potential.

• 10 stocks we like better than Robinhood Markets ›

Robinhood Markets (NASDAQ: HOOD) and SoFi Technologies (NASDAQ: SOFI), which both went public in 2021, aim to shake up traditional financial institutions. Robinhood challenges traditional brokerages with its commission-free trades and gamified approach to investing. SoFi challenges banks as a one-stop digital shop for loans, insurance policies, estate planning services, credit cards, banking services, and stock trading tools.

Yet, Robinhood and SoFi went in different directions after their public debuts. Robinhood, which went public via a traditional initial public offering (IPO) at $38, now trades at about $94. SoFi, which went public by merging with one of Chamath Palihapitiya's special purpose acquisition companies (SPACs), opened at $21.97 on the first day but now trades at less than $19 a share.

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Let's see why the bulls embraced Robinhood over the past four years but shunned SoFi -- and if it's still the stronger fintech investment.

Image source: Getty Images.

Why did Robinhood's stock soar?

Robinhood went public during the peak of the buying frenzy in meme stocks, growth stocks, and cryptocurrencies. Those trades -- which were supported by low interest rates, social media buzz, and a fear of missing out -- drove a lot of new investors to Robinhood. Its platform subsidizes its commission-free trades with a payment for order flow (PFOF) model, which sells its clients' orders to high-frequency trading firms (HFTs). HFTs then bundle together those orders in bigger batches to profit from the bid-ask spread.

From 2021 to 2024, Robinhood's year-end accounts grew from 22.7 million to 25.2 million, its assets under custody increased from $98 billion to $193 billion, and its revenue rose from $1.82 billion to $2.95 billion.

Its growth decelerated in 2022 as rising rates curbed the market's appetite for riskier investments, but accelerated again in 2023 and 2024. A lot of that growth was driven by the expansion of its ecosystem with its Cash Card, digital payments, and subscription-based Gold tier. Declining interest rates in 2024 also drove more investors back toward riskier and higher-growth investments, and it recently attracted a lot more attention by giving its investors tokenized exposure to hot start-ups like OpenAI and SpaceX.

From 2024 to 2027, analysts expect Robinhood's revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to expand at compound annual growth rates (CAGRs) of 17% and 22%, respectively. That growth could be supported by its overseas push into Europe, its rollout of more tokenized investments, and a warmer macro environment. But with an enterprise value of $86.4 billion, its stock isn't cheap at 24 times this year's sales and 47 times its adjusted EBITDA.

Why did SoFi's stock slump?

SoFi also grew rapidly after its public debut. From 2021 to 2024, its year-end members quadrupled from 2.5 million to 10.1 million, its number of products in use soared from 1.9 million to 14.7 million, and its annual revenue more than doubled from $1.01 billion to $2.61 billion. Its fintech subsidiary, Galileo, which provides its own payment and card issuing services, also grew like a weed and now serves nearly 160 million accounts. It also acquired Technisys -- a cloud-based core banking platform that enables banks and fintechs to remotely launch and manage deposits, loans, and account products more efficiently -- in 2022.

However, the temporary freeze on student loan payments in the U.S. (from 2020 to 2023) throttled its growth, and rising interest rates chilled the market's demand for fresh loans. Its transition into a digital bank (upon receiving a bank charter in 2022) also squeezed its margins with higher compliance costs and other operating expenses.

As a result, SoFi broadly missed the aggressive growth estimates it offered in its pre-merger presentation, and the bulls retreated. But from 2024 to 2027, analysts expect its revenue and adjusted EBITDA to grow at CAGRs of 21% and 33%, respectively.

That growth will likely be driven by the resumption of student loans, lower interest rates, the expansion of its digital bank, the rollout of more features for its all-in-one "super app," and the convergence of Gailieo and Technisys into a dedicated cloud-based infrastructure platform for fintech services.

Those upcoming catalysts already brought back a lot of bulls, and SoFi's stock nearly tripled over the past 12 months. But with an enterprise value of $19.3 billion, it still looks more reasonably valued than Robinhood at 6 times this year's sales and 22 times its adjusted EBITDA.

The better buy: SoFi

Robinhood has a bright future, but a lot of its recent growth was driven by the hype about its tokenized investments. Meanwhile, SoFi doesn't seem to get as much attention even though its biggest headwinds -- suspended student loans and high interest rates -- have dissipated. Therefore, I believe SoFi is still the better all-around fintech play right now.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.