It was not a pleasant ride SoFi technologies (NASDAQ: SOFI) investors. At the time of writing, shares are trading about 74% below their all-time high.
But this fintech stocks is up 48% since the start of 2023 (as of June 13), though it’s certainly been a bumpy ride. Perhaps this momentum has caught investors’ attention.
With shares trading for less than $7, are SoFi shares worth buying now? To find out, let’s look at both the bear and bull cases.
The bear case
When I analyze financial services companies, I am always reminded of how intensely competitive the industry is. Basic products and services – such as checking and savings accounts, brokerages, credit cards and various types of loans – are essentially just goods offered by large money center banks all the way down to small credit unions. It’s hard to stand out and be different, and profit margins are often slim.
SoFi has done a fantastic job of emphasizing its technology-based and digital-only platform. But at the end of the day it’s a bank. And once growth starts to slow, it could become extremely difficult for the company to continue growing.
Critics can also point to SoFi’s credit book. Personal loans account for 65% of the portfolio. In recent years, personal loans have represented the vast majority of SoFi’s lending business, signaling a transition away from student loans, where the company’s roots lie. In a recession scenario, there is an increased risk that borrowers will miss payments in greater numbers, leading to significant losses for the company.
The bull case
It’s important to understand the bear case for any company you’re considering as an investment. It is also just as important to know the bulls case.
An important aspect of SoFi’s story since its founding in August 2011 has been its tremendous growth. Even in an environment of higher interest rates and inflation, this is still the case. Revenue increased by 37% in the first quarter of 2024, with the customer base growing by 44%. Both figures are light years ahead of what they were just three years ago.
As I mentioned before, it helps that SoFi doesn’t have any physical locations. This way, the company can focus solely on providing a superior user experience that attracts higher-income and digitally savvy consumers. And by introducing new products that can be cross-sold, SoFi has a clear path to further expansion.
As with most growth-oriented companies, achieving profitability is usually an afterthought. Resources are devoted to marketing or product development in the hope of achieving greater scale. While this was once true for SoFi, this is no longer the case.
That’s because this company has now reported positive net income for two quarters in a row. I believe this marks an important turning point. Some of its larger competitors in the banking sector are consistently profitable, showing what SoFi could become. However, there is more benefit; Sofi has less overhead because it has no physical branches.
And if the bull case so far hasn’t been enough to convince you, consider SoFi’s valuation. The stock is trading well below its all-time high, which was set in February 2021. It can now be purchased at one price-to-sales ratio of less than 3, which is significantly lower than the historical average of 4.2. This tells me that now is a good time to buy shares.
The hope is that the stock price will rise in the coming years as SoFi continues to build its revenue base while growing profits at an even faster pace.
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Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Should you buy SoFi when it costs less than $7? was originally published by The Motley Fool
