SoFi Technologies (SOFI 1.07%) is the bank of the moment. It has been building its business over several years, moving from a lending company into a full financial services company, but it captured market attention when it had a blowout initial public offering (IPO) in 2020.
Like many IPOs in the 2021 boom, SoFi stock skyrocketed on little more than investor enthusiasm, and it's down 74% from its highs. It continues to be volatile, doubling last year but down 36% year to date.
Let's see where SoFi is today and whether you should add it to your buy list.
SoFi is in high growth mode
There's a reason investors were so excited when SoFi stock hit the market. It's a fast-growing financial technology (fintech) company, offering better solutions for customers who would rather see the dentist than meet with a bank manager.
SoFi is all digital, and users can manage most of their transactions with a few swipes and clicks. It was created to meet the needs of students and now also targets young professionals.
It began with loans and has expanded to offer bank accounts, credit cards, and more, but its services are still limited compared with large, traditional banks.
For no-frills, easy-to-use products, SoFi is a competitive player, and its customers don't feel limited to using the big banks anymore. The fintech has proved itself during the past few years, and users are signing up by the hundreds of thousands.
It added 622,000 new members in the 2024 first quarter for a total of 8.1 million. This was a 35% increase over last year, and products used grew by the same amount.
This means a few positives. Most obvious is the increase in business, specifically revenue. But adding new members to its system adds scale, so each member drives business exponentially.
More customers add more products, and SoFi benefits from increased engagement without extra marketing costs. Since it has an asset-light model, more services added to an account don't necessarily incur higher servicing costs like more tellers at a bank branch.
SoFi has been demonstrating improved profitability, and it has reported two consecutive quarters of net profit under generally accepted accounting principles (GAAP).
Growth is slowing for several reasons. Its base is getting bigger, and financial companies are feeling pressure from higher interest rates. But management has a longer-term outlook for a compound annual growth rate of 20% to 25% through 2026, and it's also projecting a full-year net profit this year.
SoFi is facing some hurdles
Banking is an age-old industry, and today's biggest banks have been going at this for a long time -- some for more than a century. It's not surprising that an upstart like SoFi is taking some time to meet the standards of the established banks, such as reliable profit and low default rates.
This is part and parcel of the growth curve. SoFi is doing an admirable job of building its business, and this comes with the territory when owning a growth stock.
Lending revenue fell 2% in the first quarter, and management is expecting the lending business to decline as a part of the whole for the year. That could be a benefit, because the other, faster-growing segments are rising fast enough to pick up the slack and then some.
But it's a turn in SoFi's business, and the market is waiting to see how it pans out before giving back some gains.
The stock is cheap
SoFi trades at a cheap valuation for a growth stock, at a price-to-sales (P/S) ratio of 2.8 and a forward one-year price-to-earnings (P/E) ratio of 30.
Putting this all together, I see SoFi as a strong buy, but only for risk-tolerant investors. It's by no means a guaranteed winner, and it could trade sideways or continue falling for some time before stabilizing. But if you have a long time horizon and some stomach for risk, SoFi could be an incredible addition to your portfolio, and I recommend buying it at this bargain price.
