SoFi Technologies (SOFI) has positioned itself as one of the most exciting fintech companies, offering a wide range of services and products that many traditional banks struggle to match. While shares are down about 10% this year, I believe this decline is largely due to investors’ short-term preoccupation with challenges, particularly the high interest rate environment that is now beginning to change. In this article, I will outline five key reasons that support my bullish view on SOFI stock, especially at current levels.
Strong sales growth and diversification
The first premise of my SoFi investment thesis is the impressive revenue growth. In its most recent second-quarter results, reported on July 30, SoFi delivered a strong 22% year-over-year increase in adjusted net revenue, to a record $597 million. Additionally, financial services and technology platform revenues grew 46% year-over-year and now represent 45% of total adjusted net revenues, compared to just 38% a year ago. This diversification away from lending to financial services and technology platforms increases SoFi’s growth potential and reduces its dependence on a single revenue stream, making the company more resilient.
In addition, SoFi has carved out a niche in the financial services industry by targeting a young, high-income demographic that is often underserved by traditional banks. While most major banks offer limited specialized services, SoFi offers a comprehensive offering, from student loans to wealth planning, allowing it to address the specific needs of this target group.
SoFi improves profitability
In addition to strong revenue growth, SoFi has made significant progress in profitability. The fintech has posted three consecutive quarters of profitability, with $17 million in GAAP net profit for the three months ending June 2024, compared to a $40 million loss the year before. This meaningful improvement boosts investor confidence and demonstrates that SoFi’s business model is sustainable and can scale profitably over time.
Additionally, SoFi’s focus on product development, along with its commitment to operational efficiency, is poised to drive long-term growth and profitability. Wall Street shares this optimism and expects robust earnings growth over the next three years, from $0.11 per share in 2024 to $0.64 per share in 2027. This underlines the company’s strong future prospects.
Valuation in line with future growth prospects
The company’s current valuation is also attractive relative to growth expectations. Currently, SoFi is trading at a seemingly stretched price-to-earnings ratio of 78x. However, if SoFi reaches earnings per share of $0.64 in 2027, that multiple drops to 13.4x. That valuation is much closer to traditional banks, which typically trade at earnings multiples between 11x and 13x.
That said, given that SoFi’s business is far from mature and earnings are just getting started, the current price-to-earnings ratio premium makes sense.
Membership Growth and Digital-First Strategy
My fourth positive concerns the rapid growth of SoFi’s membership base. In the second quarter of 2024, the company added 643,000 new members, representing a 41% year-over-year increase, bringing the total to 8.77 million members. SoFi’s digital-first approach also eliminates the need for physical locations and helps reduce costs while meeting consumer demand for convenient, technology-driven financial services. This strategy positions SoFi well to benefit from the continued shift to online banking and fintech innovation.
Resilient lending with sensible risk management
The fifth argument underlying my bullish view on SoFi is potential macroeconomic relief. Management has been concerned in recent quarters that higher interest rates could dampen economic activity, leading to job losses and missed loan payments. Management therefore aimed to reduce lending, initially forecasting a revenue decline of at least 5% by 2024.
But now that the Fed cut rates by half a percentage point a few weeks ago, management’s outlook is likely to improve. SoFi may have weathered the worst of the rising interest rate cycle. Lower interest rates generally improve economic activity, reducing the risk of credit losses.
Despite diversification efforts, SoFi’s balance sheet remains heavily focused on lending, with a loan-to-asset ratio of approximately 77.4%. Management’s caution was justified, as an increase in defaults could seriously threaten results. Notably, the 90-day delinquency rate on personal loans fell to 64 basis points in the most recent quarter, down from 72 basis points in the first quarter, indicating a potential spike in delinquencies.
Is SOFI a Buy According to Wall Street Analysts?
Despite the bullish arguments presented in this article, Wall Street remains cautious on SOFI stock. Of the fourteen analysts covering the stock, only five recommend a buy, six rate it a hold and three suggest a sell, resulting in an overall hold consensus according to TipRanks. SOFI’s average price target is $8.27, almost 5% lower than the recent market price.
Conclusion
In summary, SoFi’s strong revenue growth, improving profitability and strategic diversification, despite near-term challenges and cautious analyst sentiment, make a compelling case for growth at a reasonable valuation for long-term investors. With a rapidly growing membership base and a digital-first strategy, I believe the company is well positioned to thrive in the evolving fintech landscape. This justifies bullish sentiment for SOFI stock at current prices.
Revelation
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