If you had asked me where SoFi technologies (NASDAQ: SOFI) Stock prices would be where they are at this time last year. I don’t think I could have predicted that these would be approximately flat. This time last year, it was up 73% year to date and is gaining momentum.
I made some predictions about SoFi last June and they were correct: more accounts, positive net income, and higher student loan debt. I also expected better performance if interest rates fell, which is pretty obvious, and that hasn’t happened yet. I thought SoFi had strong long-term prospects, but I was hesitant to say how high it would go in the short term. It was a cautious analysis, and it was the right one. While SoFi looks like it has all the hallmarks that would make a great company and a great stock, it has faced intense external headwinds that have made it difficult for the company to fulfill its potential.
Let’s see how things could go next year.
Involvement: Increasing
SoFi’s financial services app offers a wide range of services aimed at students and young professionals. It started as a credit union for recent graduates, and the credit segment is still the largest. However, it has expanded to other services such as bank accounts, investment accounts and even travel. It also operates a white-label financial services infrastructure company called Galileo.
This combination has quickly attracted millions of members. Membership rose 41% year over year to almost 8.8 million in the second quarter, with the number of products increasing 36%. SoFi’s model is to offer an extensive list of services to generate greater engagement, and this has resulted in a number of positive benefits for the company: increased revenue, profitability at scale, and protection from pressure on its core activity, namely lending.
There’s no reason to think this will change anytime soon, and a year from now we can expect membership and engagement to be significantly higher than they are today.
Credit segment: improving
Let’s talk about that pressure on lending. It’s the main reason why investors have been flocking to SoFi stock lately. Lending is by far the most important segment, accounting for 55% of total revenue in the second quarter, although that percentage is lower than in the past.
Management praises the expansion model and the way the financial services business is growing at a rapid pace, with 80% year-over-year growth in the second quarter. That’s true, and it inspires confidence.
But that is also because the credit segment has not grown much. Lending revenues rose only 3% year-on-year in the second quarter.
Lending is also responsible for the vast majority of profits. It reported a contribution profit of $198 million in the second quarter, or almost four times as much as the financial services industry.
With interest rates starting to fall, the business is likely to shift back in SoFi’s favor, and SoFi is well positioned to kick-start its lending business in the coming months. Specifically, it should be able to benefit from the renewed interest in student loans and refinancing. If this is successful, growth should accelerate by this time next year.
Turnover: steadily increasing
SoFi’s skyrocketing revenue growth has slowed in recent years, but is still strong and stable. Net sales rose 20% year over year in the second quarter, and management expects an increase of 20% in the third quarter and 18% for the full year.
Now that the expansion model is kicking in and lending is also coming back to work, SoFi’s revenues should grow comfortably in a year.
Profit: Rises higher
SoFi has become profitable on a large scale. Often a company will swing back and forth between profit and loss along the way. However, SoFi turned profitable with a bang, reporting three consecutive net profitable quarters, and it’s indicative that this remains positive in the third quarter and for the full year.
Analysts expect earnings per share (EPS) of $0.11 in 2024 and $0.26 in 2025.
Stock: the big question
This time last year, the high interest rate issue was still a major thorn in SoFi’s side. The problem hasn’t been solved yet, but now that the Federal Reserve is cutting interest rates, the problem should go away.
SoFi shares trade at a reasonable valuation for their growth rates and potential: 3.5 times twelve-month revenue and 39 times one-year earnings.
It may not rise until the results come in, but the results will likely be positive soon, and the shares should soon follow suit.
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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.
Where will SoFi stock be in 1 year? was originally published by The Motley Fool
