SoFi Technologies (SOFI +5.31%) recently shifted from a hyped-up growth stock to a profitable fintech powerhouse. Some investors took their gains as SoFi reached its goal of profitability, and SoFi stock is down 30% this year. It's now trading below $7 and close to its lowest-ever levels. Is SoFi stock ever going back up? Or should you avoid it?
Growth + profits = a great business
SoFi is an all-digital financial services app that offers lending, banking, and other services. It gained renown for its easy-to-use interface and low-fee lending products, and it leveraged its popularity to launch a comprehensive financial services business that addresses many consumer pain points. It has become incredibly popular, resonating with its young professional and millennial cohorts, and membership has been soaring. Member count and product count both increased 35% year over year in the 2024 first quarter.
Image source: SoFi Technologies.
The increase in both membership and products accelerates the overall trajectory, and cross-selling new products also boosts sales at lower cost, leading to profitability.
After several quarters of reiterating that net income was on the way, SoFi came through with its first quarter of positive net income in the 2023 fourth quarter -- and its stock dropped. That trend continued with a second round of positive net income in the Q1 2024, plus guidance for third-quarter and full-year GAAP profitability.
What's going on?
There are several possible explanations for what seems like a strange reaction to SoFi's excellent performance and indications that it's going to continue.
One is that investors built up the price based on the potential. Now that SoFi has met its goal, investors are pocketing their gains. SoFi stock gained 116% in 2023, right before the Q4 results were released.
Another is that as it attains profitability, it's looking more like a typical bank stock, and bank stocks come with lower valuations. Consider Ally Bank, which is the top all-digital bank in the U.S. and in many ways a direct competitor with SoFi. Ally stock trades at a significant discount to SoFi.
SOFI PE Ratio (Forward 1y) data by YCharts. PE = price-to-earnings. PS = price-to-sales.
That's not a compelling argument though, to me at least, because SoFi is growing revenue much faster than Ally, by 178% versus 8% over the past three years.
Is the best yet to come?
Management is guiding for adjusted net revenue to increase about 15% in the second quarter and 16% for the full year. The financial services segment is the fastest-growing right now, and it's expected to increase 75% year over year in 2024. These are the non-lending services like banking and investing.
Financial services, along with the technology platform, accounted for 38% of total revenue in 2023, and management expects that percentage to grow to 50% in 2024. Lending revenue is expected to be at 92% to 95% of 2023 levels, so there could be a slowdown there. Lending is still pressured from the high-interest-rate climate, although originations in all of its categories, personal, home, and student, have been increasing.
NASDAQ: SOFI
Key Data Points
Whatever the reason, the plunging price seems extreme. At the current price, the valuation looks reasonable for a stock growing as fast and with as much potential as SoFi, and it might be undervalued right now. SoFi stock below $7 per share is a bargain, and in five years you'll thank yourself for buying it at this price.
