SoFi technologies (NASDAQ: SOFI) is an emerging fintech company that aims to change the way Americans manage their finances. It is leading the way towards a seamless, digital banking experience and has attracted millions of customers.
But after SoFi stock soared in 2023, shares are falling this year. Is it now in buying territory? And could adding it now help investors build a portfolio of millionaires?
The bank of the future
SoFi is a fully digital financial services provider that serves its customers through an easy-to-use, all-in-one app. It started strictly as a lending company, but now offers bank accounts, investment vehicles and more.
What sets it apart from the other digital banks that are becoming increasingly popular today is its focus on students and young professionals. It designs its products to appeal to customers in these demographics, with clear images and explanations for people new to managing their own finances. SoFi takes them by the hand and guides them for the first time in setting up their financial life.
These customers reward it with strong loyalty. In addition to the addition of new customers, the company benefits from its established customers adopting more of its products and expanding their relationships with the company.
In a nutshell, that’s SoFi’s growth strategy: attract customers with low rates and an easy-to-use interface; gain their trust (the success of which is illustrated by high product acceptance and direct deposit rates); and scale up and increase profits.
The numbers tell the story. SoFi’s net revenue rose 37% year-over-year to $645 million in the first quarter. It added more than 600,000 new members (44% more than the year-ago period) to bring the total to more than 8 million. And the total number of products used by these customers increased by 38% to almost 12 million.
It posted a GAAP (generally accepted accounting principles) net profit of $88 million, marking its first quarter in a row in the black. (That included a $59 million one-time benefit from exchanging convertible debt, but without convertible debt it was still profitable.) Management expects full-year net income of about $170 million, which would leave it in 2024 would be profitable on an annual basis for the first time. annual basis since the IPO.
Risk versus reward
There are still risks associated with this young and growing company. Previously, the path to consistent profitability was a cause for concern. And while it is now profitable and expects to continue, its operations are shifting, causing instability.
Management is working to once again expand the services that SoFi offers. Changes along these lines were key elements of the growth strategy for years ahead of the onset of rising inflation in 2021 and 2022, and that more diversified business has been a boon to the company. If the Fed had still been solely a lender, its business would have been crushed when the Federal Reserve raised rates to combat high inflation.
The launch of its diversified business has led to higher revenues and greater scale, while also hedging the company against macroeconomic pressures. The downside of the high interest rate on loans is that it now pays high interest on deposits, which attracts new customers and puts dollars into SoFi’s coffers.
However, investors were pessimistic about SoFi’s lending business. Management expects lending this year to reach 92% to 95% of 2023 levels. That contraction will be offset by the growth of the other two segments: technology platforms and financial services. They are on track to increase to approximately 50% of total net sales. The technology platform segment is expected to grow by about 20% by 2024, while financial services is expected to grow by about 75%.
In addition, SoFi recently announced a new share offering. The market generally doesn’t take too kindly to shareholder dilution, and while this share sale may not be a major problem on its own, in the context of the other concerns it strengthens the case for pessimism about the share price.
Don’t miss this opportunity
The good news is that all of these issues are short-term problems. I don’t mean to downplay what might be legitimate concerns, but when I evaluate them in the context of everything that’s going right at SoFi and the enormous opportunities that presents, for me at least the negatives pale in comparison. the positive points.
Considering SoFi’s low valuation, this seems like a bargain not to be missed. The stock trades at a price-to-sales multiple of 2.8 and a one-year price-to-earnings ratio of 30. Given SoFi’s high revenue growth and transition to sustainable profitability, it looks dirt cheap.
Investors should consider adding SoFi stocks to their portfolios for years of gains. For those who invest enough, it can deliver returns for millionaires as part of a growth-oriented portfolio.
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Jennifer Saibil holds positions in SoFi Technologies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is SoFi Technologies a Millionaire Maker Stock? was originally published by The Motley Fool
