SoFi Technologies: High Growth, Optionality, Good Valuation

SoFi Technologies (SOFI) is one of those companies that went public through a special purpose acquisition company (SPAC) last year. Like many other stocks, SOFI has taken a beating recently.

While volatility often leads to outsized returns in new sectors, companies like SoFi have to deal with such uncertainty when things take a downturn. That said, the market and ourselves are still optimistic about the company’s performance owing to its bright future prospects. 

SoFi Technologies provides services in the personal finance domain, including student loan refinancing, mortgages, personal loans, credit cards, investing, and banking through both mobile app and desktop interfaces.

The company has developed a vertically integrated platform that helps it cater to its customers. It also offers SoFi Weekly Dividend ETF, which is an equity ETF through which it makes dividend payments to shareholders.

Though SoFi Technologies has been on a roller coaster ride since it went public last year, the company is slowly trying to emerge as a leader in the newly growing fintech space. Back at the beginning of 2019, it had merely around 70,000 members, but now the number has reached almost 3 million.

At present, market forces such as the spread of the omicron variant of COVID-19, high inflation rates and recession, and potential interest rate hikes in 2022 are causing the company’s stock prices to remain unstable. Once these factors cool down, we believe the fintech stock still has a bright future.

Multiple Growth Avenues

SoFi is on a mission to promote financial independence to its customers by providing them with simplified yet personalized experiences. The best part about the company is that it can attract members to sign up for a range of offerings.

It figured out that people had to visit more than one bank to get all their stuff done, so it came up with the idea of expanding into multiple verticals such as the lending segment, launching the technology platform called Galileo, and the financial service segment to make its customer’s lives easier. SoFi had initially started out as a student loan refinancing platform only, but to this day, it expects growth across all its segments.

Besides, of all segments, SoFi’s Galileo and Financial Services segments are the primary catalysts for its growth. In the third quarter of 2020, the Galileo segment witnessed a respectable 29% increase in sales. This puts the company in a very good position to reap the benefits from future opportunities that will likely pour into the fintech industry.

Further, though SoFi’s student loan origination volumes have more than halved after the passing of the Cares Act in 2020, the company still expects a 49-55% revenue growth rate for Q4 2021, with volumes rising by a massive 179% in the financial services segment for the third quarter of 2021.  

Stronger Performance

SoFi has been consistently working towards increasing its member base. In the third quarter of 2021, the company added 377k new members, representing a major 96% increase in the member base. Also, this was its second-highest quarterly increase in history. Apart from that, its offerings also widened further to 4.3 million products, indicating 108% year-over-year growth. 

Moreover, because of such an enhanced customer base and increased number of offerings, the quarterly adjusted net revenue for the period increased to $277 million from $217 million achieved in the same period of last year. However, the EBITDA saw a significant $24 million decline.

Wall Street’s Take

Turning to Wall Street, SOFI stock comes in as a Moderate Buy. Seven out of 10 analysts have given SOFI a Buy rating, while three analysts rate it a Hold.

The average SoFi Technologies price target of $21.40 represents 60.9% upside potential.

Bank Charter to Bolster Growth

In 2020, SoFi had applied for a bank charter and acquired the community bank Golden Pacific Bancorp to accelerate the entire process. This was a major move since the company used to lean on third-party banks to provide cash management services to its members previously, which were costly. 

The logic behind applying for the bank charter is that SoFi would be able to directly provide its own services, including deposit accounts, and thereby make its entire operations much more efficient.

Moreover, with this move, the company would also be able to reduce its overall cost of lending money because the bank charter would allow the company to fund the loans using capital from the SoFi Money deposit accounts.

Most importantly, by improving the interest rates on both funds offered to borrowers as well as paid off to deposit holders, now SoFi would be able to attract more customers, which would contribute towards enhancing its overall valuation.  

Conclusion

SoFi stock comes with a perfect blend of high growth and optionality potential. However, due to the massive sell-off it has faced recently, its stock is now trading at a much-discounted value which is approximately 12.2 times its sales.

Also, while compared to most other similar fintech stocks, this might seem reasonably priced, especially after considering the significant multi-bagger prospects it can potentially offer over the next decade and beyond. 

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