717,000 Reasons to Like This Bank

Banking, lending and personal finance platform SoFi (NASDAQ:SOFI) is among the hottest up-and-coming fintech companies in today’s market. With a growing customer base of young users, the company has been able to position itself as an all-in-one financial services provider.

Despite impressive business growth, though, SoFi stock has lost well over half its value since its 2021 IPO but perhaps that’s where the opportunity lies to buy it on the dip?

So Much Good News For SoFi

SoFi reported record revenue of $537 million in Q3, up 27% from the year-ago quarter. It also added a record 717,000 new members, resulting in 47% year-over-year total member growth. Deposits rose 23 percent to $2.9 billion, driven largely by direct deposits made to SoFi accounts.

On a GAAP basis, SoFi lost $0.29 per share. Excluding a non-cash goodwill impairment, however, this loss narrows to just $0.03 per share.

SoFi has also shown robust growth in new loan originations despite an increasingly challenging credit climate. In Q3, for instance, the company originated a record $3.9 billion in personal loans, up 38% from the year before.

Student loan originations more than doubled as hopes for federal student loan forgiveness faded. In total, SoFi’s Q3 loan originations were 48% higher than in the year-ago quarter.

SoFi has delivered remarkably strong revenue growth during its short lifespan. The company went public in 2021 and generated revenues of $231 million in its first publicly reported quarter. With quarterly revenues now at more than three times that level and still rising, the fledgling company has substantially increased its financial strength in a very short period of time.

During that time, SoFi has also been able to improve its net margins, bringing it gradually closer to profitability. Q3’s net margin was -16.5%, a slip from -10.2% in Q2. Given that net margin bottomed out at -57.0% in 2021, however, the financials are certainly trending in the right direction.

The company’s trailing 12-month net margin is currently -20.3%, translating to a total loss of over $320 million. Management, however, expects to achieve positive GAAP earnings in Q4.

This expectation tracks with analyst earnings estimates, which suggest modest profitability in Q4 and throughout 2024.

Assuming this shift toward profitability is accompanied by continued growth in revenues and total members, SoFi is on track to generate gradually higher earnings over the next several years.

How High Could SoFi Stock Go? 

Analysts views on the stock’s future vary widely. With a high forecast of $15 and a low forecast of $3, there is little consensus on SoFi’s near-term direction. This uncertainty is also reflected in analyst ratings, as SoFi currently carries 5 Buy ratings, 6 Holds and 2 Sells.

As promising as SoFi’s growth and approaching profitability make it appear, it is still quite expensive by most traditional metrics. At 3.4x sales and 1.3x book value with neither positive earnings nor free cash flows, SoFi’s value is based almost entirely on future successes that come from rapid expansion.

Another potential issue for SoFi’s valuation is the fact that long-term debt has grown alongside revenues. The company owed $2.32 billion in 2021, a number that has ballooned to $6.24 billion in just over two years. This puts the company’s debt-to-equity ratio at 1.2, a level that debt-sensitive value investors may find concerning.

Will Headwinds Slow SoFi’s Growth?

While rising interest rates have benefited the company’s high-yield savings account business as young consumers become more interested in saving, they may eventually have the opposite effect on mortgages and personal loans.

Investors could also see SoFi stock continue to lose ground if a worse-than-expected 2024 causes the company’s bottom line to slip back into the red.

Deutsche Bank recently made financial headlines by forecasting a mild recession early in 2024. If the US economy slips next year, financial technology companies like SoFi could find themselves struggling to keep their growth rates up.

Finally, SoFi may find it difficult to continue selling additional credit products to its customers as Americans struggle with higher debts.

With cumulative credit card balances reaching a record of over $1 trillion earlier this year and subprime auto loan default rates at all-time highs, American consumers may be reaching the limits of their ability to service debt. This could lead to more restrained borrowing, potentially dampening the growth outlook for SoFi and other lenders.

Is SoFi Stock Undervalued?

SoFi stock is undervalued by 25% according to analysts covering the stock who have a $9.15 price target on it.

However, by traditional earnings-based metrics, SoFi carries a very high price tag. The caveat is that profitability may not be capturing the unit economics that will come down the line from investing heavily now. Look at how Amazon failed to produce profits for years while investing heavily and how that story turned out.

Assuming SoFi can continue adding new members at the rapid pace it has managed so far while also raising revenues, there is a very good chance that the stock could be trading at a discount.

Still, there are concerns for prospective SoFi stock buyers. Lower consumer appetite for debt products, a general recession or the effects of higher interest rates could dampen the company’s growth.

With that said, SoFi may also be somewhat insulated by the creditworthiness of its existing member base, as the median FICO credit score for SoFi members is currently 743.

As a result, SoFi stock may still be worth a second look despite its price. Investors with high levels of risk tolerance may want to buy small positions in SoFi to take advantage of the stock’s potential to deliver market-beating returns. Those who are less aggressive may prefer to hold off to see if SoFi delivers on its promise of positive Q4 earnings.

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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.