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Ally Financial (NYSE: ALLY) was trending lower on Friday despite the online bank reported solid earnings in the third quarter that beat estimates.

Ally Financial, a leading auto lender, posted $2.1 billion in revenue in the third quarter, which was up about 2% compared to the same quarter a year ago and topped estimates of $2.04 billion.

Net income surged roughly 20% year over year to $357 million, or $1.06 per share. On an adjusted basis, Ally made 95 cents per share, which easily beat estimates of 51 cents per share.

The stock, which is among those in Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) portfolio, was down about 4% after the opening bell, and was off approximately 2% on Friday afternoon.

What caused the selloff, and does it represent a buying opportunity for investors?

Auto financing income drops

The reason for the selloff is probably tied to some softer numbers in auto financing and an outlook that could portend some further choppiness.

Ally is one of the leading auto lenders, having formed out of GM’s auto financing arm back in 2009. So, auto loans still make up the bulk of the business.

In Q3, it generated $1.28 billion in auto financing revenue, which represented 85% of all net financing revenue and 61% of total revenue. That was down about $75 million year over year due mainly to elevated funding costs.

Ally originated $9.4 billion in auto financing, including $5.9 billion in used retail volume, $2.5 billion in new retail volume, and $1.0 billion in leases. The average yield was 10.54% in the quarter.

In terms of the bottom line, the auto lending segment saw an even bigger drop, as income fell 13% year-over-year to $175 million. This was due to higher provision for credit losses of $579 million, which was $135 million than the same quarter a year ago. The higher provisions were prompted by an increase in the retail auto net charge-off rate to 2.24%, which is up from 1.85% a year ago.

“Retail Auto net charge-offs of 2.24% are elevated, but we are confident the curtailment actions we’ve taken will drive losses lower over time,” CEO Michael Rhodes said.

Net charge-offs are basically bad loans that the company has written off as losses. The elevated net charge-offs in Q3 may have contributed to the selloff, along with the outlook for even higher charge-offs rates in Q4.

Increase in net charge-offs

In its outlook for fiscal year 2024, Ally called for the retail auto net charge off rate to be in the range of 2.25% to 2.30%. If the last quarter was elevated, this is even more elevated, and higher than initial estimates of 2.0% for the fiscal year. Higher net charge-offs indicate a still challenging environment for auto lending, particularly for new cars, with elevated rates and a potentially sluggish economy.

And when charge-offs are expected to be higher, that means that the company will likely have to allocate higher provisions for credit losses, which could eat into earnings.

Also, the company anticipated a net interest margin of 3.20%, which is a bit lower than initial projections of 3.25% to 3.30%.

Is Ally stock a buy?

These numbers suggests that Ally could be in for some challenges in the near-term, but beyond that, it might be a stock to put on your radar.

The market for new cars is expected to improve in 2025, as rates begin to fall, making new cars more affordable. As the leader in the space, Ally would certainly benefit.

Also, Ally stock has a dirt-cheap valuation, trading at just 7 times forward earnings, so it looks like a good value.

It might be wise to wait a bit as the stock price could dip further in Q4, but by the start of 2025, Ally stock might be a good one to reassess and consider at a deep discount.

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