Shares of a prominent fintech company have not met investor expectations.
SoFi Technologies (SOFI), which started trading in late 2020, entered the public markets at an advantageous time. Initially, shares surged by 146% to their peak in February 2021.
However, since then, this fintech stock has declined by 70%. Nevertheless, focusing on the company’s underlying fundamentals may reveal a potential buying opportunity.
### The Business Model and Its Competitive Strengths
SoFi provides a variety of financial services, including checking and savings accounts, brokerage services, insurance products, credit cards, and loans. Unlike traditional banks with extensive branch networks, SoFi operates through a fully digital platform, which has been advantageous as internet and smartphone usage increases.
This digital strategy has been effective, especially as SoFi has capitalized on the proliferation of technology. The company aims to deliver a superior user experience to its nearly 8.8 million customers through a user-friendly mobile app that simplifies financial management.
SoFi targets a younger and more affluent demographic. The average SoFi student loan borrower has a FICO credit score of 764 (out of 850) and an annual income of $137,000, making this a highly desirable user base for the company.
### Growing in a Profitable Manner
In 2022 and 2023, SoFi reported year-over-year revenue growth of 60% and 35%, respectively. For the first half of the current year, revenue growth slowed to 28%. While this deceleration may be concerning, it still indicates significant growth potential.
One area where SoFi has excelled is in attracting deposits. The company currently holds $23 billion in customer deposits, a substantial increase from $7 billion at the end of 2022. This boost in deposits underscores the bank’s earnings potential, as deposits provide a low-cost and reliable funding source for loan growth. It also signifies the trust people have in the fintech.
SoFi has reported positive earnings per share (EPS) for three consecutive quarters. Management is optimistic this trend will continue, expecting significant growth in EPS in the coming years. They project EPS to rise from $0.09-$0.10 this year to $0.68 by 2026, driven by better management of operational expenses.
### Risks and Valuation
Despite its strengths, SoFi faces various risk factors. One notable concern is the surge in personal lending. As of June 30, 62% of SoFi’s $25 billion loan book consists of higher-risk personal loans. This could be problematic if the economy deteriorates, leading to potential losses from missed payments, which may have contributed to the stock’s recent underperformance.
Additionally, competition is a critical factor for investors to consider. Major money-center banks are enhancing their digital capabilities, which could challenge SoFi’s tech-forward position.
Despite these risks, the stock may be an attractive addition to a portfolio. SoFi’s competitive position and profitable growth trajectory are noteworthy. The shares are currently trading well below their all-time high, with a historically low price-to-sales ratio of 3.4.
Bullish investors who are willing to invest significantly and maintain a long-term perspective may have the best opportunity to benefit financially from owning SoFi.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.
