In this first-round matchup, the enterprise software juggernaut matches up with the digital banking innovator.
March 8, 2023
Welcome to our 7investing Market Madness competition! Throughout this campaign, we’re matching popular stocks up against one another to determine which will be the best investment over the next three years. And then, by voting in the poll at the bottom of the article, you can help us determine which stock will go on to the next round!
Our rankings are determined by the total return of the stock during calendar 2022. The highest-ranked stock had the best overall return of those in our tournament, and our lowest-ranked stock had the lowest overall return.
In this first-round matchup, enterprise software titan Microsoft (NASDAQ: MSFT) takes on the digital financial services innovator SoFi Technologies (NASDAQ: SOFI). Microsoft’s stock fell (29%) during 2022, while SoFi dropped (72%).
But past performance is not predictive of future returns. Which of these stocks do you believe will provide investors with the best forward three-year return? Read our investing thesis and cast your vote in the poll below!
Our Market Madness tournament is in support of our new 7investing Starter membership, which we are giving away free during the entire month of March. To get started with Starter — and to see how it’s already beating the market by 20 percentage points — click here to automatically apply your “madness” promo code.
Advisor Coverage: Matt Cochrane
After years of strong growth, powered by Azure and its resurgence in enterprise software, Microsoft‘s results have finally returned to earth. The company’s 2023 second-quarter results were lackluster, fueled by anemic growth and macro uncertainty. The enterprise software giant’s revenue rose to $52.7 billion, a paltry 2% increase year over year, while adjusted EPS fell to $2.32, a 6% decrease from last year’s second-quarter results.
More important than the immediate numbers were the two themes that dominated the quarterly conference call. Management mentioned AI 27 times, as CEO Satya Nadella announced that “the next major wave of computing is being born as we turn the world’s most advanced AI models into a new computing platform.”
Nadella stated that the world is seeing exponential improvement in foundational AI models and that Microsoft is positioned well to capture a lot of this new demand as a leader in AI. Azure is being used to train state-of-the-art services from customers and partners, such as OpenAI’s ChatGPT. Just a week after Microsoft opened its OpenAI service widely available, more than 200 customers were already using it.
Cost optimization was the other central theme, as some form of it was expressed 23 times. After rapidly increasing their digital spending in the wake of COVID, Microsoft’s customers are now looking for ways to reduce spending on these workloads.
Nadella stated two things were causing customers to look over their tech spending to see where it could be optimized. First, many customers rapidly ramped up their IT spending during the pandemic. After catching their breath, these same enterprises are seeing if they are getting maximum value from this increased spending. Second, clients are being more cautious given the uncertain economic environment.
A sparse few days after Microsoft announced its quarterly results, CEO Satya Nadella and several other Microsoft executives took to the stage to announce the coming of the new Bing. The new search engine comes with an AI-powered chatbot more powerful than ChatGPT that has been customized for search. Not one to shy away from grandiose statements, Nadella said:
AI will fundamentally change every software category, starting with the largest category of all – search. Today, we’re launching Bing and Edge powered by AI copilot and chat to help people get more from search and the web.
Microsoft is trumpeting the new Bing as a copilot for the web that will deliver better search results, more complete answers, a new chat experience, and will even provide creative sparks.
While it might not usurp Google’s throne, a lot is going on at Microsoft. Just as it led in the cloud computing and enterprise software revolutions, it appears to be in a full-court press to maintain its lead in the AI revolution.
Advisor Coverage: Steve Symington
I find it intriguing that so many skeptical traders try to argue that up-and-coming FinTech leader SoFi Technologies should be “valued like a traditional bank” — that is, as a slow- or no-growth legacy financial instution based on some modest multiple of its tangible book value (rather than a more aggressive multiple of sales or enterprise value as one might otherwise assign to a fast-growing fintech stock). Nevermind that SoFi wasn’t actually a bank until its national bank charter was only just approved by regulators a little over a year ago. And that’s not to mention the fact total deposits at SoFi Bank climbed 46% sequentially in Q4 2023 to $7.3 billion — a byproduct of SoFi taking market share from traditional large banks — effectively lowering its cost of funding for loans while driving net interest margin higher.
In fact, since receiving its bank charter in early 2022, SoFi has made schocking progress toward CEO Anthony Noto’s goal of building SoFi into a “top 10 financial institution” in the U.S.:
SoFi Bank’s rank among U.S. banks as measured by consolidated assets:
-Q4 ’22: 149th
CEO @anthonynoto says SoFi is taking market share from big banks and “won’t stop until we’re one of the top 10 financial institutions in the country.”
I’m long $SOFI
— Steve Symington (@7investingSteve) February 24, 2023
For perspective, on that list of the largest chartered banks in the U.S. (updated quarterly) as measured by consolidated assets, No. 10 (TD Bank) currently has a market capitalization of over $110 billion today, while the largest bank (JPMorgan Chase) has a market cap of $404 billion — both far cries from SoFi’s comparatively tiny $6 billion market cap today.
Bears also seem to be ignoring any incremental value added via banking-as-a-service aspirations; SoFi has another stated goal of becoming the so-called “AWS of FinTech” through its fast-growing Technology Platform segment, where revenue climbed 61% year over year last quarter, to $85.7 million.
We must keep in mind, of course, that fintech stocks have been absolutely pummelled over the past year in part as the market frowns upon businesses that drive growth by forsaking bottom-line profitability. And that could remain a headwind should SoFi’s growth slow or if it fails to drive operating leverage in the comign quarters. But during SoFi’s most recent earnings call in January, shares rallied hard as SoFi not only crushed top- and bottom-line expecations to end 2022, but also told analysts it expects to achieve quarterly GAAP net income profitability by the end of 2023 with net income margins of 20% for the full year.
I’d be remiss if I didn’t point out the lingering headwind of SoFi’s student loan refinancing business. Formerly its largest segment, SoFi’s student loan business is currently operating at around 25% of pre-pandemic levels due both to the U.S. government’s ongoing student loan repayment mortatorium, and uncertainty surrouding challenges in court to the Biden Administration’s student loan forgiveness plan. SoFi, for its part, actually advocated a similar forgiveness plan focused on distressed borrowers several months before Biden unveiled his own. At the same time, however, SoFi also waded into this controversial topic with its own lawsuit challenging Biden’s continued extensions of the moratorium (at the very least, it’s asking the courts to have payments resume for affluent borrowers who wouldn’t otherwise qualify for forgiveness under the Biden plan).
In any case, with SOFI shares trading at less than a third of their first-day closing price from June 2021, and assuming SoFi maintains even a small semblance of this momentum in the coming years, I’m convinced this will be an absolute monster of a stock (in a good way) going forward.
Will Micosoft or SoFi Technologies be the better investment for the upcoming three year period? Cast your vote in our live poll below!
Market Madness matchup 3:
Microsoft $MSFT (3) vs. SoFi Technologies $SOFI (14)
Which of these two companies will provide the greater investing return over the next 3 years?
— 7investing (@7investing) March 8, 2023
Yesterday’s matchup paired AbbVie (NYSE: ABBV) up against Coinbase (NASDAQ: COIN).
Our analysis showed AbbVie to risk losing revenues as its blockbuster drug Humira comes off-patent, but also has plenty of other cash-generating segments to fully-fund its pipeline and its steadily-growing dividend. Coinbase is a much riskier option, attempting to establish trust with clients and consumers in the volatility cryptocurrency markets that shed $1.5 trillion in market capitalization in 2022.
Ultimately, AbbVie won 65% of the popular vote and will be progressing on to the next round.
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