Based upon its advertising, Ally Financial (NYSE:ALLY) is a digital-first provider of financial services. However, while Ally may position itself as a fintech-like entity, those in the know about ALLY stock are well aware of the company’s true business: auto lending.

Ally Financial is the successor to GMAC, the former finance arm of General Motors (NYSE:GM). GM sold its remaining stake in Ally in 2013.

Since the GM split, and especially in more recent years, Ally’s auto lending segment has become focused mainly on originating and holding used vehicle loans.

This wasn’t an issue during 2021, when pent-up demand for used vehicles resulted in a big jump in profitability. Since last year though, this high used car exposure has become a negative.

Worse yet, despite reporting a big drop in earnings, and experiencing a big share price decline, Ally’s troubles have yet to enter the rearview mirror.

Why It’s not a Fintech

The line between traditional financial institutions and fintech has become blurred in recent years. For instance, with its acquisition of a bank charter, SoFi Technologies (NASDAQ:SOFI) has become more similar to a bank than other fintechs such as PayPal (NASDAQ:PYPL) and Block (NYSE:SQ).

Conversely, “old school” institutions like Ally become more like fintechs as of late. A good example of this is with Ally’s brokerage platform, Ally Invest.

Ally Invest has more in common with retail-friendly brokerages like Robinhood (NASDAQ:HOOD) than it does with traditional brokerage houses.

So, do these “fintech features” make ALLY stock a fintech? Not exactly. While Ally’s non-auto businesses have become an increasingly larger portion of the financial institution’s asset base, automotive related loans and lease finance arrangements still make a majority of its $181.7 billion balance sheet.

Automotive lending and related services also continue to make up a lion’s share of Ally’s annual net revenue.

Again, being an auto-focused lender was a good thing for Ally during 2021, when earnings per share nearly tripled, from $2.89 to $8.28 per share, thanks to a favorable environment for the auto industry. It’s been a different story, however, since 2022.

The Worst May Not Yet be Priced-In

The deflating of the “used car bubble” has weighed heavily on ALLY stock, with shares dropping by around 44.7% over the past twelve months.

Mainly, because of worsening results. Although net interest income went up in 2022, rising auto loan charge-offs and loss provisions outweighed this.

As a result, earnings last year fell by around 38.9%, to $5.06 per share. Sell-side analysts expect an additional decline in EPS this well, with consensus currently coming in at $3.76.

With the stock trading at a single-digit multiple to this forecast, it may appear as if it accounts for current headwinds for with ALLY.

However, it’s possible that current forecasts may be too conservative. Conditions in the used car space, where Ally makes 71% of its loan originations, are expected to worsen during 2023.

Ally has already conceded that it expects net charge-offs to keep climbing, from 1.7% to 2.2%.

Even worse, Ally has especially high exposure to one of the used car industry’s riskiest players. As Louis Navellier recently pointed out, Ally is a key funding source for Carvana (NYSE:CVNA), currently agreeing to provide up to $4 billion in financing, under a forward flow agreement.

Bottom Line

Already in a tough spot, if the U.S. economy enters a recession this year, and/or unemployment keeps rising, Ally’s loan losses could end up being far greater than currently expected.

While bank run fears from earlier this month may have been an overreaction, worse-than-expected results could additionally pressure shares. A recovery could play out much more slowly than current forecasts, which call for earnings to bounce back starting in 2024.

In the long-run, Ally’s potential to further morph into a fintech may be limited, given competition from up-and-coming names like SoFi.

Unless this auto-focused bank acquires/merge with another large to mid-sized financial institution, its fortunes are likely to remain tied to the health of the automotive market.

Considering the current situation with the used vehicle market, it’s best to err on the side of caution, and avoid ALLY stock.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.