Is SoFi Stock a Bargain?

Fintech company SoFi Technologies (NASDAQ:SOFI) has been on investors’ radars for some time. The company gained prominence by offering student loan refinancing before developing a comprehensive suite of financial service products.

 

Having sold off by over 60 percent year to date, SoFi could be a bargain play on the growing fintech space. Is SoFi undervalued?

 

In large part, SoFi’s woes have been the result of a student loan payment moratorium maintained by the federal government since the early days of the COVID-19 pandemic.

 

Student loan refinancing is one of SoFi’s primary offerings. For the last two years, however, borrowers have had little incentive to refinance their loans.

The ongoing mortarium notwithstanding, SoFi shares didn’t lose most of their value in 2021. Looking at historical prices, the most serious drop began in early 2022. Around this time, technology and fintech companies were selling off across the board.

 

Rising interest rates and inflation have further pressured these high-growth companies. It appears that these macroeconomic factors have contributed to SoFi’s selloff, as the student loan moratorium was already in place before the stock suffered its largest losses.

 

Despite headwinds, SoFi performed well in the most recent quarter. The company reported 57 percent year-over-year revenue growth, reaching $362.5 million in total revenue.

 

While Q2 was still a losing quarter for SoFi, its losses narrowed considerably compared to the same quarter in 2021.

 

Loss per share came out to $0.12 in Q2, a substantial improvement from the $0.48 loss in Q2 2021.

SoFi’s quarterly report also included extremely positive customer base growth. SoFi added 450,000 new members during the quarter, for a total of 4.3 million users.

 

This represents a 69 percent increase over the previous year and demonstrates that consumers are actively interested in the company’s financial services.

 

Analyst forecasts strongly suggest that SoFi will experience at least something of a rebound this year.

 

The median 12-month target price for SoFi is $8, 29.4 percent higher than the current price of $6.18.

 

8 out of 14 analysts also rate SoFi as a buy, with the remaining 6 offering a hold rating.

 

By traditional value metrics, SoFi stock doesn’t appear to be much of a bargain right now. The stock trades at 4.19 times sales, compared to an average of 1.91 for its industry.

 

Although losses have narrowed over the last year, the lack of positive earnings is also a red flag from a traditional value perspective.

 

The real question regarding SoFi, however, is how much it can grow by offering new products and restarting its student loan refinancing business.

 

As the Q2 report showed, the company is rapidly paring its losses and adding new customers. As such, it appears to be on a good trajectory for substantial growth.

 

Taking its potential growth into account, the valuation looks much more attractive. In fact, there’s even a possibility that SoFi stock could be undervalued.

 

Although the stock has certainly gone through a rough patch this year, there’s a great deal to like about SoFi’s business.

 

To begin with, the most recent extension of the student loan moratorium is expected to be the final one. When payments begin again, borrowers will have new incentives to seek out refinancing. This development alone will likely boost SoFi’s business considerably.

 

In January, SoFi also gained regulatory approval to act as a national bank. With this charter, SoFi began offering checking and saving accounts, expanding its lending business and developing a host of new product offerings.

 

It appears that management is keen to exploit the opportunities that come with being a national bank, as SoFi introduced 702,000 new products for its customers in Q2.

 

SoFi also hosts an investing app that allows users to trade stocks, buy ETFs, set up automated investing plans and even create retirement accounts. Together with its other product offerings, this investment platform allows SoFi to act as an all-in-one solution for its customers’ personal finance needs.

 

Of course, there are still very real risks associated with SoFi. One key criticism of SoFi is that too much of its compensation package is stock-based. In Q2, for example, the company paid out nearly 22 percent of its total revenue in stock-based compensation. This aggressive use of stock compensation causes share dilution and could be a long-term problem for investors.

 

SoFi also needs to find ways to improve the profitability of its basic financial services. At the moment, checking and savings accounts are essentially being used to bring customers in.

 

Thereafter, SoFi uses cross-selling to usher those customers into more profitable products. Improvements in the profitability of the most basic and widely-used products would substantially bolster the company’s bottom line and reduce its reliance on successful cross-selling.

 

In the long run, there appears to be a good buy argument behind SoFi. The company has successfully narrowed its losses, diversified its business and grown its customer base over the last year. In time, SoFi has a good chance of achieving profitability and maintaining steady growth.

 

Rising interest rates could also benefit SoFi’s lending business. Higher rates tend to favor banks and lenders by allowing them to earn larger returns on capital. With more Federal Reserve rate hikes expected in the coming months, SoFi and other financial institutions could perform well for the rest of 2022 and into 2023.

 

Investors should be aware, however, that SoFi is still a fairly risky investment. As 2022 has shown, high-growth tech companies are susceptible to unexpected macroeconomic downturns. SoFi also has a structural issue in the form of stock-based compensation that could reduce investor returns.

 

Overall, SoFi is an attractively priced growth fintech stock. While conservative investors will likely find its lack of earnings offputting, the potential returns could be worthwhile for more risk-tolerant investors. This is especially true as SoFi expands into the banking business, which should be somewhat less risky than its other business lines.

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