SoFi Technologies (SOFI -0.62%) is an up-and-coming fintech company that aims to change the way Americans manage their finances. It’s leading the charge toward a seamless, digital banking experience, and it has attracted millions of customers.
But after SoFi stock soared in 2023, it’s tanking this year. Is it in bargain territory now? And could adding it now help investors build a millionaire-maker portfolio?
The bank of the future
SoFi is an all-digital financial services company that serves its customers through an easy-to-use, all-in-one app. It began as strictly a lending business, but now offers bank accounts, investing tools, and more.
What helps it stand out from the other digital banks proliferating today is its focus on students and young professionals. It designs its products to be appealing to customers in those demographics, with clear graphics and explanations for people who are novices in the arena of managing their own finances. SoFi takes them by the hand and walks them through setting up their financial lives for the first time.
These customers are rewarding it with strong loyalty. Beyond the additions of new customers, it is benefiting as its established customers adopt more of its products and expand 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; earn their trust, (success at which is illustrated by its high product adoption and direct-deposit rates); and scale up and increase profits.
The numbers tell the story. SoFi’s net revenue increased 37% year over year in the first quarter to $645 million. It added more than 600,000 new members (44% more than it added in the prior-year period) to bring its total to more than 8 million. And the total number of products being used by those customers increased by 38% to nearly 12 million.
It posted GAAP (generally accepted accounting principles) net income of $88 million, making Q1 its second straight quarter in the black. (That included a one-time benefit of $59 million from exchanging convertible debt, but it was still profitable without it.) Management is projecting full-year net income of about $170 million, which would make 2024 the first time it was profitable on a full-year basis since it went public.
Risk vs. reward
There are still risks associated with this young and growing company. Previously, its path to consistent profitability was a cause for concern. And although it’s now profitable and predicting that to continue, its business is shifting, which creates instability.
Management is moving to again expand the services SoFi offers. Changes along these lines were major elements of its growth strategy for many years preceding the onset of rising inflation in 2021 and 2022, and that more diversified operation has been a boon for the company. Were it still entirely a lender, its business would have been crushed when the Federal Reserve raised interest rates to combat that high inflation.
The launches of its diversified businesses have led to higher revenue and greater scale, and also hedged the business against macroeconomic pressures. The flip side of high interest rates on loans is that it now pays high interest rates on deposits, which attracts new customers, and puts dollars into SoFi’s coffers.
However, investors have been pessimistic about SoFi’s lending business. Management is projecting that the lending business will come in at 92% to 95% of 2023 levels this year. That contraction will be countered by the growth of its other two segments — technology platform and financial services. They are on track to increase to about 50% of total net revenue. The technology platform segment is forecast to grow by about 20% in 2024, while the financial services business is expected to grow by about 75%.
In addition, SoFi recently announced a new equity offering. The market doesn’t usually look too kindly upon shareholder dilution, and while this stock sale might not be a huge deal on its own, in the context of the other areas of concern, it bolsters the arguments for pessimism about the stock price.
Don’t miss this opportunity
The good news is that all of these issues are short-term concerns. I don’t mean to downplay what could be legitimate worries, but when evaluated in the context of everything that’s going right at SoFi and its huge opportunity, to me at least, the negatives pale in comparison to the positives.
When you factor in SoFi’s low valuation, this looks like a bargain not to be missed. The stock trades at a price-to-sales multiple of 2.8 and a forward one-year price-to-earnings ratio of 30. Considering SoFi’s high sales growth and its transition to sustained profitability, it looks dirt cheap.
Investors should consider adding SoFi stock to their portfolios for years of gains. For those who invest enough, it could deliver millionaire-maker returns as part of a growth-focused portfolio.