The last time I covered Santander (LSE: BNC), I concluded that the stock could be an excellent investment for any portfolio, based on its low valuation and its market-beating dividend yield of 5%.
However, one area where the bank disappoints is its lack of growth. While the group recently reported a healthy 18% year-on-year increase in profits for 2018, analysts are expecting a more subdued performance going forward. The City has pencilled in earnings per share growth of just 3.6% for 2019.
So while I still believe that the Santander share price presents incredible value for investors and income seekers, I think growth investors will be disappointed.Â
With this being the case, I’m considering the outlook for UK fintech startup Funding Circle (LSE: FCH) instead.
Explosive growth
Compared to Funding Circle, Santander looks as if it’s standing still. Today, the peer-to-peer lender reported a 55% year-on-year increase in revenues to £142m which, according to CEO Samir Desai, is another “record-breaking year for the firm.“
However, while revenues hit a record, pre-tax losses also surged, climbing 40% from £36.3m to £50.7m.
Looking forward, management expects this trend to continue. It’s forecasting more revenue growth, but losses are expected to continue for the foreseeable future.
Funding Circle’s management thinks revenues will rise above £200m in 2019, and adjusted operating losses will fall, with the firm remaining loss-making overall. City analysts have pencilled in a net loss of £32m for 2019, a slight improvement on 2018’s figures, although this is based on revenues of £199m.
As the company now expects to beat this top line estimate, I wouldn’t be surprised if we see a number of analysts revisit and reduce their loss estimates for the group this year over the next few weeks.
Different companiesÂ
At first glance, Santander and Funding Circle couldn’t be more different. Santander is one of the largest established banks in Europe that earned €7.8bn in net profits last year. Funding Circle is still losing money and in its early stages of growth.
But despite its losses, I think Funding Circle could be the better long-term buy. One of the reasons why the company is losing so much money is because it’s reinvesting 41% of revenues back into marketing and building the brand. Over time, this marketing spend should fall as the business’s customer base grows.
Indeed, according to the company, in 2018 43% of group revenues came from existing customers, up 67% year-on-year, while 74% of lending also came from existing investors. As existing borrowers and investors are cheaper to acquire, (the cost is virtually zero) Funding Circle makes the bulk of its income matching these lenders and borrowers.
What I’m really excited about is the firm’s potential around the world. Last year, it only generated revenues of £48m from its US and international operations. This is just a snip of these multi-trillion pound lending and borrowing markets. So the opportunity for Funding Circle in these markets is tremendous and, if the enterprise gets it right, the sky’s the limit for the firm’s growth.
So overall, if you own Santander and are you’re wondering what to do with your investment, I reckon it could be worth selling a small percentage of your holding and investing the proceeds in Funding Circle today.