SoFi technologies‘ (NASDAQ: SOFI) The company has continuously grown since its IPO in 2020. You can’t say the same about the share price. SoFi shares have underperformed the market since their debut, delivering a total return of 46%, compared to 77% for S&P500 index holders. The stock price has been underperforming index funds for years, which is likely to frustrate investors.
The underlying activities have grown much faster. Revenues are up 263% cumulatively, making it one of the fastest-growing companies on the public markets since shares began trading. Does this rapid growth and underperforming stock price make SoFi a buy today? Where will it be in five years? It’s time to take a closer look at this financial technology (fintech) disruptor and see if it belongs in your portfolio today.
SoFi started as a student loan marketplace at Stanford in 2011 and eventually branched out into student loan refinancing. Today, it has grown into an all-in-one mobile application for your personal financial needs.
Banking, investing, credit products, even cryptocurrencies and private market investing: you’ll find it all in the SoFi app. This pitch, along with SoFi’s aggressive marketing campaigns, has led to steady user growth for SoFi’s various products. It had 9.4 million members in the third quarter, up from just 1 million in the first quarter of 2020.
I expect that this growth formula will have led to even more use and brand awareness in five years. There are more than 100 million households in the US that SoFi can target. This applies not only to online banking, but to virtually any financial service a consumer needs. SoFi’s growth rate will undoubtedly slow (this is a competitive industry, after all), but SoFi clearly has a value proposition that resonates with users. I wouldn’t be surprised if the total number of customers reaches twenty million within five years.
A few years ago, the majority of SoFi’s business was lending. This included student loans, as well as personal loans and home loans. The company is still active in this area today and investors can expect the loan portfolio to grow as long as SoFi continues to capture customer deposits. Total loans outstanding in the third quarter were $25 billion, compared to $23 billion in the second quarter of 2024.
Investors were concerned about SoFi’s credit performance as an unproven lender that was growing rapidly. SoFi has addressed these concerns, showing loan performance data that suggests current loans are performing better (meaning fewer borrowers are defaulting) than in 2017. This is good news and likely why the stock is down after the company’s earnings jumped last quarter.
However, I predict that SoFi’s business will increasingly shy away from lending over the next five years. This has already happened in recent years. The company’s financial services revenue (credit card transaction revenue, investment brokerage revenue) and technology platform revenue now represent 49% of total revenue, up from 24% in the first quarter of 2021. Both segments are growing rapidly and could help SoFi diversify its activities, making it less susceptible to a downturn in lending.
The technology platform, called Galileo, helps third-party financial institutions do things like setting up digital accounts and direct deposits. This is high-margin revenue that reached $100 million last quarter and grew 14% year over year. Galileo and the technology services sector should help grow SoFi’s revenues over the next five years.
SOFI Earnings Data (TTM) according to YCharts
Estimating SoFi’s financial performance is difficult given its different business segments. Lending should be valued like a bank, which uses book value and net interest income as its main valuation metrics. The other segments, such as financial services and technology platform, would be much better valued based on turnover and contribution margin.
Let’s try to simplify things to see if SoFi stock is a buy at current prices. During the last twelve months, sales amounted to $2.5 billion. Due to the business momentum in user acquisition and customer deposits, I believe SoFi’s revenue could double to $5 billion in the next five years. The company isn’t making much in net profit at the moment, but it’s likely that profit margins will reach 10% (if not more) over the next five years as the company matures.
That would bring SoFi’s annual net profit to $500 million over five years. Compared to the current market cap of $17.7 billion, that would be a price-to-earnings (P/E) ratio of 28 in five years, which is above the current P/E of the S&P 500, now less than 26. Of course, the SoFi’s revenue could more than double within five years and its net profit margin could be above 10%, but in this scenario the stock would still be trading at a premium profit five years from now. From my seat, the stock looks a bit overvalued at current levels. I don’t expect the shares to be much higher in five years.
Consider the following before purchasing shares in SoFi Technologies:
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Where will SoFi stock be in five years? was originally published by The Motley Fool
