Buying the Post-Earnings Dip in Ally Financial is a Perfect Fit

Say it with me ALLY stock owners, it’s hip to be square 

With respect to Huey Lewis and the News, investors in Ally Financial are, in my opinion, getting a nice gift with the post-earnings dip in Ally Financial (NYSE: ALLY). The fintech company known for auto lending posted solid earnings on  October 21, but the stock dropped 5% for the day.  

Ally blew away analysts’ forecasts for earnings by delivering $2.16 per share. That was 14% higher than the consensus estimate and a whopping 72% higher than the $1.25 EPS the company delivered in the same quarter in 2020.  

Net revenue came in lighter than forecast at $1.99 billion (as opposed to $2.11 billion). However, it was still an 18% year-over-year increase from the $1.68 billion the company recorded in 2020.  

But that wouldn’t seem to be enough to make such a significant drop in ALLY stock. Particularly when the company reported its fiftieth consecutive quarter of customer growth.   

The other reason seems to center around concern about the company’s intention to buy Fair Square Financial for $750 million. The deal is expected to close in the first quarter of 2022. Despite initial investor sentiment this is likely to be a bullish move for ALLY stock.  

Will the Third Time be the Charm? 

According to chief financial officer, Jennifer LaClair, Ally has been trying to figure out the credit card business “for years and years.” In 2019, Ally started winding down the proprietary cash-back card that it had offered with Toronto-Dominion Bank. The company was looking to purchase CardWorks in 2020. However, the pandemic forced the company to abandon the $2.65 billion deal.  

In Fair Square, Ally has found a company that, according to LaClair, “was ready to sell and it fit in really well with our priorties.” The purchase will give Ally access to a business with over 650,000 cardholders who are carrying balances of $763 million.  

Fair Square is a growing, digital-first company that fits Ally’s reputation as an agile market leader. As the company showed in its earnings call presentation, credit cards were a missing piece of the company’s product offerings. The transaction will give Ally access to the $1 trillion credit card market. And with consumers carrying $763 million on their cards, the company is likely to generate significant interest income. 

Do Credit Cards Fit the Fintech Model? 

There’s a part of me that understands why investors may be sour on this deal. The credit card model has been in trouble for years. In 2018, PayPal (NASDAQ: PYPL) CEO Dan Schulman predicted that plastic payment cards would “be history within 20 years.” Schulman theorized at the time that digital payment apps would replace cards.  

And considering that Ally Financial should be a company on the forefront of creating these digital payment apps, it’s fair to ask why they would get into the credit card business. 

Investors may also be frowning on the company’s marketing expenditure. Ally just launched its largest marketing campaign ever titled, "We're All Better Off with an Ally”.  

Buy Into Ally’s Strength 

Call it institutional investors looking for weak hands. Call it investors selling the news. You can even say that some investors were looking for any sign of weakness to take profits. Whatever reason you assign for the drop in ALLY stock, this looks like a good opportunity to buy the dip. Analysts still give the stock an upside of approximately 8% and that may increase after they weigh in on the company’s earnings.