Should One Consider Investing in SoFi's Shares?
SoFi Technologies (SOFI dropping by 1.73%) has found its way back into the good graces of the market after a rough year, reversing its downward trend. While SoFi doesn't fit neatly into a single category, it's not your typical banking stock. It's a tech-driven company, yet it offers more than just technology. In many ways, it pushes the boundaries of the fintech category, but it's hard to define it conventionally due to its robust banking services that provide a degree of stability that traditional fintech companies lack.
Unsurprisingly, the market often struggles to comprehend it. The stock has shown high volatility since its initial public offering, and now it's on an upward trajectory again after a fall throughout 2024, almost doubling over the past three months.
Understanding SoFi requires deep diving. So let's dive in and decipher the company and whether or not it's a smart investment at this time.
The tech-driven bank
SoFi, a completely digital banking service, has demonstrated impressive growth and success in recent years. It started as a student loan cooperative, focusing on the student and young professional demographic. It's a niche market ripe for exploitation, as these younger users are less inclined towards conventional banks that can sometimes seem complex and intimidating. SoFi aims to be an alternative – everything is online and user-friendly, establishing itself as the go-to platform for straightforward and functional financial services.
This approach is resonating with users, as membership is increasing at an alarming rate. In the third quarter, there were 756,000 new members, bringing the total to close to 9.4 million.
SoFi consistently promotes its strategy of attracting younger customers with its easy-to-use platform, high-interest rates, and low fees, keeping them within the SoFi ecosystem as their financial needs evolve. This results in high user engagement, increased adoption of products, higher sales, and scale. It added 1.1 million new products in the quarter, bringing the total to 13.7 million.
Revenue growth accelerated in the quarter to 30% year over year, and this surge in revenue led to an increase in profitability. Net income was $58 million in the quarter, up from a loss in the previous year, and this was the fourth consecutive quarter with positive net income under generally accepted accounting principles (GAAP). Management anticipates further strong growth and positive profits for the entire year.
More to the picture
While this is a simplified overview, there are deeper layers to SoFi that the market is considering and factoring into the stock price.
At its core, SoFi is a lending company. It has expanded into financial services and a white-label financial infrastructure business, but lending accounts for the majority of its business. Its cross-selling strategy is working, but it's not just for generating higher revenue or increasing user engagement. It has also played a crucial role in the company's performance during a period of high interest rates and tightening lending conditions.
For the past few quarters, SoFi's management had predicted that lending revenue for the year would be below 2023 levels. With lending still accounting for the majority of its business and profits, this was a disappointment.
However, the non-lending segments are growing in importance and are both profitable. Together, financial services and tech platform accounted for 49% of total adjusted revenue in the third quarter. The financial services segment saw a spectacular 102% growth in the quarter, and management expects it to increase 80% for the entire year. It also revised its guidance across the board and now expects lending revenue to at least match 2023 levels. With interest rates finally decreasing, the lending business may see improved results in the near future.
Where the stock is heading
If SoFi were valued like a typical bank stock, it would be extremely overpriced at its current price. It has a forward one-year P/E ratio of 60, while a typical bank tends to trade around 10. Banks are often valued by a price-to-book value, and a ratio greater than 1 can be expensive. SoFi's price-to-book ratio is 2.6.
However, the market recognizes that SoFi is a tech stock and a growth stock. It's still in an expansion phase, requiring significant capital expenditures to capture market share and develop its platform. Most banks operate at lower growth rates, with their size allowing them to easily cover their expenses with revenue.
Since SoFi is expected to continue growing at high rates, it can maintain a higher valuation. At its current price, there's ample room for SoFi stock to climb without becoming unreasonably expensive, and investors can feel comfortable taking a position now if they plan to hold for the long term.
Despite its high valuation, the market recognizes SoFi as a tech and growth stock, warranting a higher valuation due to its expansion phase and high growth potential. In this context, investing in SoFi could be beneficial for long-term investors, given the room for its stock price to increase further without becoming excessively expensive. Additionally, SoFi's robust banking services and cross-selling strategy have shown promising results, contributing to its revenue growth and projected profitability in the coming year.