Fintech company SoFi (NASDAQ:SOFI) is working to create an all-in-one financial ecosystem for its millions of members. Though it came to prominence largely as a student loan platform, SoFi today offers everything from banking and credit cards to mortgage refinancing.
The company’s stock surged briefly to over $25 in early 2021, but subsequent market conditions and the onset of higher interest rates have brought it down closer to $10 per share.
Is SoFi a buying opportunity today, and could the stock become a 10-bagger in the years to come?
2.3 Million Reasons To Buy SoFi
Despite the challenging conditions of the last couple of years, SoFi has managed to keep its head above water. The company has consistently posted doubt-digit revenue growth rates.
In Q2 of 2022, SoFi reported total revenues of $389 million. Just two years later, the number for Q2 of this year was $861 million. Though growth rates have slowed down, the most recent quarter still saw revenues rise by over 27% year-over-year.
Of even greater importance for investors is the fact that SoFi has become profitable over the past year. The company posted positive net incomes in each of the last three quarters, and management now expects GAAP net income to total $175-185 million this year. Encouragingly, that number was revised upward in Q2’s reporting.
Taking a look under the hood, SoFi also seems to be making strong progress in expanding its product offerings and getting new members into its ecosystem of financial products. In Q2, membership grew by 643,000 to reach about 8.8 million. For the full year, management expects to add at least 2.3 million new SoFi members.
A larger share of the company’s total revenues also now come from financial services instead of lending. While lending revenue grew 3% year-over-year in Q2, financial services revenue grew by a staggering 80 percent. This result is important, as it shows that SoFi members are increasingly turning to the company for their basic banking needs as well as for lending purposes.
SoFi also continues to build its product offerings to generate more value from both existing and new customers. Recently, for instance, the company expanded into the early IPO market by partnering with PrimaryBid to build a new IPO platform. Such moves by SoFi show the potential of Fintech to compete with more traditional financial institutions even beyond the realm of personal finance and lending products.
A final point to note in SoFi’s performance is the fact that the company still has a massive reserve of cash at its disposal. Cash and cash equivalents available to the company total $2.33 billion. Though this is a drop from the $3.09 billion the company had at the end of last year, this reserve appears to be more than sufficient to allow SoFi to expand aggressively going forward.
What About the Stock’s Valuation?
SoFi’s performance is impressive, but the stock’s price may initially concern value-oriented investors.
Shares currently trade at about 101 times expected earnings and 24.8 times cash flow, both of which suggest overvaluation. This view, however, is somewhat tempered by the comparatively lower price-to-sales and price-to-book ratios of 4.5x and 1.8x, respectively.
At this point, SoFi is priced very much as a high-growth company. Based on the company’s ongoing performance and its potential to expand in the future, there is at least a chance that this pricing could be justified.
Management intends to eventually make SoFi a top-10 financial institution, a goal that would almost certainly leave plenty of room for the company’s valuation to continue rising if it is eventually met.
How High Could SoFi Stock Go?
If analysts are to be believed SoFi stock has the potential to rise to $13 per share, the most optimistic price target.
The consensus remains more muted at $8.73 per share, suggesting that SoFi is marginally overvalued at this time.
That leads to the question, what catalyst could spur a 10x increase?
How Could SoFi 10X?
SoFi’s potential path to becoming a 10-bagger seems to have two primary parts.
The first will be the sustained expansion of its financial services ecosystem, allowing it to create an ever-more valuable experience for its members and, by extension, attract even more members to its platform.
The second is to derive more value from its lending business, which still accounts for a majority of total revenues. By pursuing both of these goals, SoFi may well have a very long runway to expand its earnings and raise its share prices.
On the first front, SoFi is already performing extremely well. The expected addition of over two million new members in 2024 alone could give the company a major boost.
Continued acquisition efforts are likely to keep building this base, allowing SoFi to market new products to consumers who are already doing business with it. SoFi also recently broadened its line of credit cards, giving its members more flexibility in choosing the right card for their financial needs.
SoFi is also making rapid progress toward extracting more value from its lending business. The most crucial recent development was a $2 billion agreement with Fortress Capital to expand SoFi’s personal loan capabilities.
This effort, SoFi hopes, will help it move toward lower-capital lending activities that will allow it to collect more revenue in the form of fees. Lower interest rates are also likely to help SoFi’s lending business, especially as the economy appears to be coming in for the Federal Reserve’s much-anticipated soft landing.
Together, these efforts should set SoFi up for a long run of earnings growth. In Q2, earnings amounted to just $0.01 per share. As a result, the company has a great deal of upside opportunity. This extremely low earnings figure, reflecting the fact that the company has just crossed the threshold of profitability, also may make the high P/E ratio the stock trades at a bit more palatable.
Investors must clearly understand, however, that SoFi rising to 10 times its current value is a long-term and uncertain proposition.
There are still headwinds the company will have to overcome, most notably its habit of diluting its shares through extremely generous stock-based compensation packages. Over the last 12 months, the number of outstanding shares of SOFI has increased by 13.7%.
As such, SoFi may be a buy for long-term growth investors seeking high returns. The company has ample potential and appears to be performing quite well at the moment. Starting from a low baseline as it is, this leaves the possibility that SOFI shares will multiply in the years to come. More conservative investors, though, may prefer to wait a while to see how SoFi continues to progress.
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