SoFi Technologies, Inc. (SOFI), a leading Fintech company, reported better-than-expected Q3 earnings on Oct. 29, making progress across all its business segments. SoFi stock lost some momentum after the earnings report. Still, it came back strongly on Oct. 30 on the back of the improving fundamentals of the company, indicating that the tide is turning in favor of SoFi after a challenging period characterized by increased regulatory scrutiny, credit quality concerns stemming from rate hikes, a growing pile of loans held for sale on the balance sheet, and profitability concerns.
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I am turning bullish on SoFi because I believe macroeconomic conditions are finally improving, allowing the company to grow profitably in the next five years.
SoFi Delivered an All-Round Performance in Q3
One of the main reasons for my bullish stance on SoFi is the strong performance of its business segments in Q3, which suggests the company is on the right path to sustainable growth. SoFi operates under three business segments: financial services, technology platforms, and lending. In Q3, SoFi’s financial services more than doubled its revenue to a record high of $238.3 million, aided by a 5x growth of the loan platform business where the company generates fees by referring pre-qualified borrowers to bank partners. This stellar revenue growth and prudent cost management resulted in the contribution margin expanding to 42% from just 3% a year ago.
Although the technology platform segment did not grow as much as the financial services segment, the 14% year-over-year revenue growth reported by this segment marks an acceleration from the 9% year-over-year growth registered in the previous quarter. This suggests the technology platform business, where SoFi is offering a vertically integrated technology stack for its customers to build on, is seeing an acceleration in demand as business spending on IT infrastructure gathers momentum following rate cuts.
SoFi’s lending business also performed well in Q3, with revenue up 14% year-over-year, aided by higher net interest income and robust loan origination growth across key verticals such as personal, student, and home loans.
SoFi’s strong performance in all three key business segments in Q3 is an early sign that the company’s recovery is gaining momentum. The expected improvements in the macroeconomic environment facing SoFi should help the company carry this momentum into 2025.
The Macroeconomic Outlook Is Improving
The changing macroeconomic outlook for SoFi is at the heart of my bullish thesis for the company. The Fed is expected to cut rates tomorrow and deliver a follow-up rate cut in its December policy meeting. The Fed’s attempts to stimulate the economy, which began with the first rate cut of this cycle last September, should create strong demand for loan products while minimizing default risk, which is good news for SoFi. The increasing affordability of loans will likely contribute positively to SoFi’s financial services business and the lending business despite a potential contraction in net interest margins, as robust loan volume growth should offset the margin contraction effect.
In addition to rate cuts, the resumption of student loan repayments is also likely to boost SoFi’s profitability in the coming quarters. Before the pandemic, the student loan refinancing business accounted for the bulk of SoFi’s revenue and earnings, and the company took a major hit when the Biden Administration halted student loan repayments in light of Covid-induced challenges.
Although Federal student loans began accruing interest in September 2023, the government introduced a student loan on-ramp program shielding borrowers who failed to make timely full loan repayments that lasted through Sep. 30, 2024. With government protection expiring, SoFi is well-positioned to thrive as student loan repayments start flowing through in the coming quarters.
SoFi Enjoys a Long Runway to Grow
My bullish sentiment toward SoFi has been buoyed by the company’s recent diversification efforts, which have opened doors to long-term growth. With regulatory challenges bringing the student loan refinancing business to an abrupt halt during COVID-19, the company was forced to look for new growth avenues. Today, SoFi is more than just a student loan refinancing company; it is exposed to several other end markets, such as insurance, wealth management, and banking solutions.
In addition to the expected diversification benefits, I am also impressed by SoFi’s focus on high-quality borrowers, as this reduces the default risk. Although many Fintech companies tend to focus on high-risk borrowers, SoFi has maintained a cautious approach that is likely to reward shareholders in the long term. According to company data, the weighted average income of a personal borrower is $164,000, with a weighted average FICO score of 746. The weighted average student borrower earns $135,000 and has a credit score of 765. SoFi has maintained stable delinquency rates despite rising interest rates by catering to high-income, creditworthy borrowers.
Given SoFi’s focus on high-quality borrowers, the company is likely to see strong demand for lending products when rate cuts trigger economic growth.
Is SoFi a Buy, According to Wall Street Analysts?
The analysts’ opinions on SoFi completely contrast my stance on the company. Based on the ratings of 13 Wall Street analysts, the average SoFi price target is $8.63, which implies a downside of 26.93% from the current market price.
SoFi may seem expensively valued at a forward P/E multiple of 93, but I believe the company is well-positioned to grow in double-digits over the next five years. This makes it one of the few companies in the financial services sector that would see meaningful growth in the foreseeable future. For this reason, I expect SoFi to trade at premium valuation multiples for an extended period.
Takeaway
SoFi stock, which has been up 52% in the past 12 months, is likely to see strong momentum in the next year as well, given the improving macroeconomic outlook and SoFi’s unique positioning as a diversified financial services platform. The strong financial performance in Q3 is a precursor to what SoFi could achieve under favorable business conditions. Given its growth trajectory, I believe the company will continue to trade at above-average earnings multiples.
