The COVID-19 pandemic has accelerated digitalization and led to a spike in online transactions. Synchrony Financial (SYF) and Green Dot Corp. (GDOT), two prominent players in the fintech industry, have been thriving amid these conditions because of rapid adoption of digital payments to facilitate the “new normal” way of living.

SYF is a premier consumer financial services company that delivers a wide range of specialized financing programs and innovative consumer banking products across key industries including digital, retail, home, auto, travel, health, and pet. In addition, it is one of the largest issuers of private label credit cards in the U.S.

GDOT is a fintech and bank holding company that is steering consumers  toward non-traditional banking products by providing reliable, affordable debit accounts that make everyday banking hassle-free. Its BaaS (Banking as a Service) platform is growing among America’s most prominent consumer and technology companies.

Both stocks have generated decent returns over the past five years. While SYF returned 41.8% over this period, GDOT gained 281%. In terms of past month’s performance, SYF is a clear winner with 12.9% returns versus GDOT’s 4.9%. But which of these stocks is a better pick now? Let's find out.

Latest Movements

CareCredit, a SYF solution and a leading provider of promotional financing for patients, recently collaborated with RevSpring, in a bid to facilitate seamless integration of the credit card application and payment option of CareCredit to RevSpring’s payment gateway, PersonaPay. Notably, RevSpring utilizes data-driven insights for rolling out enhanced patient engagement and payment solutions. Moreover, CareCredit was integrated into Open Dental practice management software back in October 2020.

GDOT launched GO2bank, a new unlimited mobile bank, last week. The product aims to deliver safe, seamless, affordable banking with overdraft protection, early access to pay and benefits, high-value rewards, and credit tools. In November, the company collaborated with Google Pay to offer Plex Account. GDOT also launched a strategic long-term investment and partnership with Gig Wage, a 1099 payments platform, to deliver better banking and financial tools to the world’s growing gig economy, in the same month.

Recent Financial Results

In the third quarter ended September 2020, SYF’s revenue declined 39% year-over-year to $1.5 billion. Purchase volume remained flat on a core basis to $36 billion. Active accounts at the end of quarter came in at 64.3 million, decreasing 8% on a core basis compared to the year-ago quarter. However, the company’s EPS surged 767% sequentially to $0.52.

GDOT had an excellent third quarter. Its total operating revenues grew 21.3% year-over-year to $291 million. Purchase volume spiked 25.7% year-over-year to $7.6 billion. And its active accounts at the end of quarter came in at 5.72 million, growing 10.4% compared to the year-ago quarter. However, the company reported a loss of $0.06 per share, compared to the year-ago loss of $0.01 per share.

Past and Expected Financial Performance

SYF’s revenue and EPS have declined at a CAGR of 5.7% and 5.4%, respectively, over the past three years.

However, analysts expect the company’s revenue to increase 4.2% in the current year. SYF’s EPS is expected to grow 113.3% in the ongoing quarter and 84.3% in the current year. Moreover, its EPS is expected to grow at a rate of 3.1% per annum over the next five years.

In comparison, , while GDOT’s revenue grew at a CAGR of 46%, its EPS slid at the rate of 13.3%, over the past 3 years.

Analysts expect GDOT’s revenue to increase 3.7% in the current year. The company’s EPS is expected to decline 28.7% in the current quarter but grow 13.1% in the current year. Moreover, GDOT’s EPS is expected to grow at a rate of 4.8% per annum over the next five years.

SYF has an edge over GDOT here.

Profitability      

SYF’s trailing-12-month revenue is nearly five times GDOT’s. Additionally, SYF is more profitable with a net profit margin of 23.3% versus GDOT’s 4%.

Moreover, SYF’s ROE of 10.1% compares favorably with GDOT’s 5.1%.

Valuation

In terms of forward P/E, GDOT is currently trading at 80.40x, 308% more expensive than SYF, which is currently trading at 19.69x. But GDOT is currently  trading 32% less expensive in terms of trailing-12-month P/S.

In terms of trailing-12-month price/cash flow, GDOT’s 17.32x is 527% higher than SYF’s 2.76x. However, the forward PEG of both for SYF and GDOT are similar (3.19x versus 3.64x).

SYF looks more affordable compared to GDOT.

POWR Ratings

While SYF is rated “Strong Buy” in our proprietary POWR Ratings system, GDOT is rated a “Buy.” Here are how the four components of overall POWR Rating are graded for SYF and GDOT:

SYF has an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. In the 48-stock Consumer Financial Services industry, it is ranked #9.

GDOT has an “A” for Trade Grade and Industry Rank, a “B” for Buy & Hold Grade, and a “C” for Peer Grade. It is ranked #25 in the same industry.

The Winner

In the current tech era, fintech is a vital segment of the economy, which is expected to grow at a double-digit rate over the next decade. A study by Ark Investment Management indicates that fintech adoption could increase exponentially. The firm estimates digital wallet users in the United States to reach 227 million, at a 27% CAGR, by 2024.

Hence, both SYF and GDOT are good long-term investments considering their ability to meet the rising demand for remote financial transactions, continued innovation, and expansion strategies. However, SYF appears to be a better buy based on the factors discussed here.

We think SYF is both an established player and a relatively cheaper option to bet on the immense growth potential of the e-commerce and digitization of major service industries.

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SYF shares were trading at $36.08 per share on Monday morning, down $0.50 (-1.37%). Year-to-date, SYF has gained 3.95%, versus a 1.44% rise in the benchmark S&P 500 index during the same period.

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.

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