SoFi Technologies(NASDAQ: SOFI), a provider of online financial services, went public by merging with a special purpose acquisition company (SPAC) on June 1, 2021. The combined company's stock opened at $21.97 on the first day, but it now only trades at about $11.
Like many other SPAC-backed start-ups, SoFi lost its luster after it missed its own ambitious pre-merger forecasts. Rising interest rates and a moratorium on student loan payments also throttled the growth of its lending services. But as interest rates decline and the macro environment warms up again, is it the right time to buy, sell, or hold SoFi's stock?
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Understanding SoFi's business
SoFi, which is short for Social Finance, was founded at Stanford University in 2011. It initially focused on providing more affordable student loans than traditional banks, and it subsequently expanded its data-driven fintech business with mortgages, auto loans, personal loans, credit cards, insurance services, estate planning, and stock investment tools. In 2022, it obtained a U.S. bank charter and started operating as a digital-only direct bank.
SoFi ultimately aims to become a "one stop" online bank for financial services, which eliminates the need for different types of banking and investment apps. Its digital-only model also allows it to expand more rapidly than its brick-and-mortar competitors, and it accelerates, optimizes, and automates a lot of its services with AI algorithms.
SoFi's number of members more than tripled from 2.52 million at the end of 2020 to 8.77 million in the second quarter of 2024. Its number of products used grew nearly sevenfold, from 1.85 million to 12.78 million, during the same period.
From 2020 to 2023, SoFi's adjusted revenue grew at a compound annual growth rate (CAGR) of 49%, from $621 million to $2.07 billion. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive in 2021 and increased at a CAGR of 279%, from $30 million to $432 million.
Those growth rates were astounding, but SoFi still missed its pre-merger targets of generating $2.11 billion in adjusted net revenue and $484 million in adjusted EBITDA in 2023. That miss can be attributed to rising interest rates, which made new loans and refinancing options less attractive, and the protracted federal freeze on student loan payments.
The reasons to buy and hold SoFi's stock
The bullish view for SoFi is it's an outstanding stock to buy and hold because its two biggest headwinds are finally dissipating. The U.S. Federal Reserve cut its benchmark interest rate for the first time in four years in September, and it's widely expected to keep reducing those rates for the foreseeable future. The federal freeze on student loan payments, which was implemented during the peak of the pandemic in early 2020, officially ended in late 2023.
SoFi has also been exploring ways to expand its customer base without increasing its leverage. For example, it recently signed a $2 billion deal with Fortress Investment Group to underwrite its loans but offload them to other lenders. By doing so, it can generate more fee-based revenues but avoid taking on more debt.
SoFi's enterprise-facing fintech subsidiary Galileo, which it acquired in 2020, is still growing like a weed as it provides its payment processing, card issuing, and other services to over 100 companies across 16 countries. On its own, Galileo hosts 158 million accounts and generated 10% of SoFi's contribution profit last year. The expansion of that financial services platform should reduce its dependence on consumer loans.
SoFi was initially bleeding a lot of red ink, but it's stayed consistently profitable on a generally accepted accounting principles (GAAP) basis over the past three quarters. Those rising profits indicate that its rapid growth rates are sustainable.
The reasons to sell or avoid SoFi's stock
The main problem with SoFi is that it doesn't look like a screaming bargain yet. Analysts expect the company to generate a full-year GAAP profit this year and grow its earnings per share at a CAGR of 100% over the next two years, but it already trades at 43 times next year's earnings. In comparison, Nu Holdings (NYSE: NU), which is growing at a much faster rate by operating a digital-only direct banking platform in Latin America, trades at 26 times next year's earnings.
SoFi's price-to-book ratio of 1.99 also makes it pricier than traditional banks like Bank of America and Wells Faro, which have ratios of 1.18 and 1.33, respectively. SoFi also increased its number of outstanding shares by 32% over the past three years -- and that dilution could prevent its valuations from cooling off even as its stock price declines. That might be why its insiders sold more than 100 times as many shares as they bought over the past 12 months.
Is it the right time to buy, sell, or hold SoFi's stock?
SoFi could still have plenty of room to grow as it challenges traditional banks, brokerages, and digital payment platforms -- but it could also eventually end up as a jack of all trades but a master of none. I might be interested in buying SoFi's stock at a lower price, but I'd avoid it and focus on more attractively valued fintech stocks for now.
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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
