SoFi technologies (NASDAQ: SOFI) is on a roll. The stock recently rose to $10 per share, its highest price since early 2022. It’s progress, but the stock is still down about 60% from its all-time high reached during the 2021 market bubble. SoFi is a digital bank , but it’s not exactly a bank stock. (Well, it’s not a traditional bank stock.)
So, what is SoFi? It could be an industry disruptor with traditional banking features and the added benefit of a technology company.
Here are five reasons why investors should consider buying SoFi Technologies and putting it away for the foreseeable future.
1. It is extremely popular among consumers
At first glance, SoFi Technologies is a digital bank. It offers banking services, loans and financial products through its website and smartphone app. Unlike many legacy banks, SoFi has no physical branches. It is a business model born in the digital age. More importantly, SoFi has become quite popular. The company’s customer base has grown from 1.4 million in early 2020 to nearly 8.8 million today.
SoFi’s customer base grew 41% year over year in the second quarter, so this trend still has a lot of momentum. SoFi has become especially popular among young, high-earning adults. This is one of the most valuable customer segments in the financial sector because they will drive the economy for decades to come.
2. More than a bank
Behind the scenes, SoFi has financial technology in its DNA. In 2020, it acquired Galileo, a fintech company that provides payment processing, card issuance and integrated financial services to more than 100 companies, including H&R block, ToastMoneyLion and others, in 16 countries. Collectively, Galileo customers account for 158 million accounts.
SoFi’s technology platform segment (Galileo) increased its contribution earnings by 24% last year, representing about 10% of the company’s total in 2023. Additionally, Galileo accounts have grown fivefold since the first quarter of 2020. Over time, Galileo could play a more important role. contributing to SoFi’s business and exposing investors to broader growth in the fintech industry.
3. The advantage of a student loan
SoFi started in the student loan industry and built a reputation in refinancing. In 2019, SoFi made $6.7 billion in loans. However, the federal student loan freeze for most of the past four years and higher interest rates since 2022 have actually reduced demand for refinancing. SoFi’s student loan originations were just $2.6 billion in 2023, despite adding millions of customers since 2019.
It seems the worst is over. The federal freeze is all but over and interest rates have seemingly peaked. Meanwhile, analysts estimate that the private student loan market could grow 10% annually through the early 2030s. SoFi’s student loans could unfold like a spring and fuel growth in the coming years.
4. SoFi could benefit from fee-based revenue
SoFi may not function quite like a traditional bank in the long term. Traditional banks hold loans on their balance sheets and collect interest. Default risk affects how the market values bank stocks compared to most other companies. Galileo already represents a non-borrowing component of SoFi’s business, but things have gotten more interesting lately.
Just days ago, SoFi announced an agreement to expand its personal lending business with a $2 billion financing deal with Fortress Investment Group. Simply put, SoFi underwrites personal loans, but then pays them off. SoFi misses out on interest income, but does reduce the balance sheet risk. CEO Anthony Noto commented in the press release, noting that the goal is to grow SoFi’s fee-based revenue. Keeping fewer loans on the books could impact how the market values SoFi stock.
5. Earnings growth is about to take off
I often use book value to evaluate bank stocks, but Galileo and a potentially less credit-dependent business model make earnings a viable way to value SoFi stock. SoFi reported GAAP earnings for the third consecutive quarter in the second quarter of 2024. The company is in the sweet spot where operating leverage (when revenues grow faster than costs) drives rapid earnings growth.
Analysts estimate that SoFi will grow earnings an average of 51% per year over the next three to five years. Given SoFi’s popularity and growth potential, I wouldn’t be surprised if the company saw strong earnings growth in the near future. The stock appears to be a candidate to perform well for investors as earnings will increase in the coming years.
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*Stock Advisor returns October 14, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Toast. The Motley Fool has a disclosure policy.
1 Digital Banking Stock Down 61% to Buy and Hold Forever was originally published by The Motley Fool
