SoFi Technologies, Inc. (SOFI) is a customer-facing FinTech company with a three-pronged suite of high-growth financial products in play, which aims at providing services related to mortgages, student loan refinancing and investing to name but a few.
The company has seen its user-base expand significantly in the wake of the coronavirus pandemic, with customers switching to online banking services after the extended lock-down of brick-and-mortar institutions.
SoFi’s Business Model
There are three major segments to the company: there is its Lending wing, dealing with personal loans, home loans, student loans, etc.; there is the Galileo Technology Platform, which serves as a back-end integration solution; and a Financial Services branch, facilitating and transacting various credit card, insurance and investment products.
And SoFi is growing each of these segments at a rapid clip. For instance, its Galileo platform went from 30 million accounts in the first quarter of 2020, to 70 million in 2021. Similarly, SoFi grew its platform members sequentially from the fourth quarter 2020 by 430,000, resulting in a total of 2.28 million today.
Furthermore, the company recently acquired Golden Pacific Bancorp as part of its bid to be granted its own bank charter. There are many benefits associated with SoFi having its own charter, including:
- lowering its cost of capital,
- increasing its net interest margin by holding loans for longer, and
- the ability to provide loans from deposits held on its own platform.
Is SoFi’s Valuation Fair?
SoFi is unprofitable at the moment, but the company estimates it can grow revenues by 43% per annum for the next four years, achieving a net profit of $1.51 billion at the end of that period. It also believes it can do this while increasing margins from 3% to 32% as well.
To pull this off, SoFi will have to rely on its expanded suite of financial products to function as its key growth driver. The company currently expects to make just $44 million in revenue from its financial services wing during 2021, but predicts this will increase to $1.2 billion in 2025. Contrast these figures with its lending segment, where growth is slated to appreciate at more modest pace from “just” $710 million to $1.6 billion.
SoFi has yet to release a quarterly statement of earnings as a publicly traded company, although it did release its Q1 results ahead of the SPAC merger with Social Capital Hedosophia Holdings Corp. V. However, you can still get a rough sense of where it’s at with its valuation by looking at the competition it faces in the sector.
First, let’s look at SoFi’s numbers against those of Affirm Holdings, Inc., a FinTech proposition that functions as a minimal friction point-of-sale loans and payment platform. Here, Affirm sports a forward Price/Sales ratio of 20, with revenues of $832 million and a market value of $16.8 billion. Given that Affirm and SoFi both have capitalizations in the same region – SoFi has a market cap of $16.6 billion – and they are both “growth stage” companies, we can see that SoFi’s Sales multiple of 17 stacks up well against Affirm’s.
But we can be a lot more ambitious here – judging as we are that SoFi’s ambitious growth plans will play out over time – and start making comparisons with the likes of other big name FinTech plays such as PayPal (PYPL) and Square (SQ).
Naturally, these two giants enjoy much greater revenue incomes, with PayPal slated to pocket $26 billion worth of sales in 2021 – against a market capitalization of $303 billion – and Square expected to make $20 billion in revenue off of a company worth $96 billion.
Computing these figures, we get a forward Sales multiple for PayPal and Square of 11.7 and 4.8 respectively. Given that these two brands are much more mature than SoFi, and taking into account the many ways that SoFi still has to grow, the income streams it can generate, and the potential granting of its banking charter, the company’s own Price/Sales number looks decidedly cheap considering you can assign a substantive premium on the back of these positive catalysts.
Finally, to come up with a concrete valuation for SoFi, we can afford ourselves a little cherry-picking, and take as our base multiple Square’s astonishingly high non-GAAP trailing PE rating of 189. On this comparison, assuming those earnings of $1.51 billion we mentioned earlier, this would give SoFi a market cap of $285 billion.
Yes, a little unrealistic perhaps: but it serves to show just how much this company has in the tank to grow if everything goes right over the next couple of years.
Risks of Buying SoFi Stock
The importance of the forthcoming decision by the Federal Reserve on whether SoFi is granted a banking charter is one obvious risk point on the horizon for the firm.
Without this charter, SoFi not only loses out on the previously mentioned financial benefits that comes along with it, but it also stymies the company’s competitiveness with its rivals. Square, for example, has already begun operating its own industrial banking division, and it’s likely other FinTech companies will pursue this path too.
Another uncertainty for SoFi stems from the fact that the company is running a multiple-front business in a sector where most firms focus on just one niche. By providing so many business lines, SoFi risks eroding its already optimistic profit margins, and puts it into direct confrontation with other banks and FinTech enterprises that can out-compete it on the grounds of being more specialized and adept in their own particular niche.
Is SoFi Stock A Buy? The Bottom Line
Without a doubt, SoFi is a strong Buy at the current time. The firm has both short-term and long-term tailwinds at its back, and, with so many catalysts ready to drive the company forward, it’s hard to see where SoFi can go wrong.
There are certainly some risks associated with the business, but the momentum behind this ambitious company should be enough to see it through. Buy now and don’t sell; this one has all the hallmarks to be a multi-bagger.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.