Is SoFi Stock a Millionaire Maker?

Shares of fintech company SoFi (NASDAQ:SOFI) have been falling steadily since peaking in 2021. In the last year alone, SOFI shares have shed 30% of their value.

Wall Street analysts, however, now seem to believe that this selloff may have pushed SoFi shares too low, setting the stage for an eventual comeback.

The median 12-month price target for the stock is $8.50 per share, implying an upside of over 30% from the latest closing price of $6.35.

Is SoFi a steal today and will it turn brave investors into millionaires, or has the long selloff simply turned the stock into a value trap?

SoFi’s Fundamentals Have Improved as Prices Fell

One of the strongest arguments that SoFi could be undervalued has to do with the fact that the company has been able to improve its performance even as share prices have continued to deteriorate.

In Q1, total net revenue grew by 37% year-over-year to $645 million. This marked the ninth consecutive quarter of double-digit annualized revenue growth.

Much of this growth was accounted for by the financial services and tech platform business segment, which saw its revenue grow by 54%.

Management stressed the role of this segment in offsetting its lending activity revenue, which was more or less flat compared to the year-ago period.

Even more important for investors is the fact that SoFi has finally become profitable. Q1’s net income of $88 million represented 13.6% of total net revenues, an impressive feat considering the fact that it was only the company’s second profitable quarter.

The Q1 performance was a major improvement on Q4, when the company earned just $28 million. In Q1 of last year, SoFi lost over $34 million.

Most crucially, SoFi accomplished these improvements without loading up on debt, a factor that could explain the decay of share prices in spite of better fundamentals.

In Q1, the company’s long-term debt actually fell by more than 50% on a year-over-year basis. Though SoFi still has a debt-to-equity ratio of 0.5x, the company appears to be managing its debts well and paying them down to improve its financial position.

Real Estate Market To Deliver a Strong Tailwind?

Another upside for SoFi is the fact that housing demand remains strong and home listings are once again spiking upward.

Part of SoFi’s lending business relates to mortgage financing, creating opportunities for the company in a real state market that still appears to be in a strong upward cycle.

The company has invested heavily to position itself within the mortgage financing space. In 2023, it acquired Wyndham Capital Mortgage, a fellow fintech company specializing in mortgage loans.

Wyndham had already specialized in all-digital mortgage processes, and the integration with SoFi’s large user base creates opportunities for SoFi to become an end-to-end mortgage provider for young, tech-savvy borrowers.

Is SoFi Priced Too High?

As embattled as SoFi stock is, by some measures it looks fairly cheap for a high-growth company right now.

The price-to-sales ratio of 3.2x, for instance, is somewhat low when SoFi’s high revenue growth rate is taken into account. Likewise, the company’s 16.0 price-to-cash-flow makes it look actively cheap.

By some other metrics, though, SoFi still commands a bit of a premium valuation for a company that has struggled as much as it has. The forward P/E ratio, for example, is 79.4. Coupled with a 1.5 price-to-earnings-growth ratio, this makes the stock look fairly pricey on an earnings basis.

Future growth may very well still justify the ratios SoFi trades at today. Analysts predict that earnings per share will continue to rise steadily through next year, delivering a consensus estimate of $0.29 per share in 2025. If this comes to fruition, it will translate to 21.9x FY2025 earnings.

Beware Of Digital Bank Landmines

The market has been ill-inclined to respond to the company’s fundamental improvements by taking share prices higher. Given this market sentiment, it’s possible that a quarter or two of worse-than-expected performance will drive share prices even lower than their present level.

Despite the potential tailwinds from the real estate market, SoFi is still much more heavily invested in personal and student loans. Both of these categories carry their own risks.

Personal loan delinquencies have been gradually trending upward since bottoming out in 2021. This trend may very well continue as American households have taken on record levels of consumer debt that could squeeze household budgets. With that said, SoFi tends to loan to high-quality borrowers knowns as HENRYs, or high-earners not rich yet.

Student loans, though historically sound, are facing long-term headwinds as fewer US high school students make plans to attend college.

The number of college students earning degrees has fallen for two consecutive years, and more are opting for shorter, cheaper certificate programs in response to rising tuition costs.

This won’t wipe out the student loan business all at once, by any means, but it has the potential to become a negative long-term trend for financial instruments that have historically been seen as a key part of American higher education.

Another issue for SoFi shareholders that partially explains the disparity between returns and the performance of the business is the ongoing dilution of SoFi shares.

SoFi has increased its outstanding share count in every quarter since Q2 of 2022. Though the rate of increase fell into the low single-digits through much of 2023, it jumped again to 12.2% in Q1 of this year.

This dilution may prove problematic for investors if it continues at this rate because it slowly drains value away from existing shareholders.

Is SoFi Stock a Millionaire Maker?

With 41.7% upside to analysts’ consensus price target, SoFi has the potential to reward shareholders handsomely but is not likely a millionaire maker.

SoFi presents a mix of positive and negative attributes, but the good seems to outweigh the bad when the stock’s selloff is taken into account.

SoFi shares appear to be best suited to highly risk-tolerant investors looking for high upsides in distressed stocks. Even these investors who choose to buy the stock may want to keep their SoFi positions small until the company can establish a firmer track record of earnings growth. .

The potential, however, appears to be in place for SoFi to rebound and deliver strong returns if current growth trends continue without interruption.

SoFi has taken a beating in the stock market, but the underlying performance of the company calls into question whether the selloff has been sensible.

If the company can keep this performance up, the market is likely to eventually reprice the stock upward to reflect SoFi’s much-improved fundamentals.

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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.