Contemplating the Purchase of SoFi Technologies Shares with Current Prices Under $20?
Contemplating the Purchase of SoFi Technologies Shares with Current Prices Under $20?
SoFi Technologies (-3.74%) hasn't quite hit the mark with many investors since its IPO. The fintech company went public via a SPAC merger on June 1, 2021, with an opening price of $21.97.
However, its current trading price sits at around $16. Unsurprisingly, like many SPAC-backed companies, SoFi has fallen short of its pre-merger projections. The pressure intensified with rising interest rates, which negatively impacted its valuation. Despite this, some Wall Street analysts remain optimistic about the stock.
Out of the 19 analysts covering SoFi, only three advise selling. Despite trading above its average price target of $11.66, it still falls short of the top price target of $20. Should investors purchase SoFi now, hoping for it to reach those lofty Street projections?
Pioneer in digital banking
SoFi, a shortened form of Social Finance, was established in 2011. Initially focusing on offering more student loans than traditional banks, it later expanded its services to include mortgages, auto loans, personal loans, credit cards, insurance services, estate planning, and stock investment tools.
In 2022, SoFi secured a U.S. bank charter and launched a digital-only direct bank. Its digital-first approach allows it to expand at a faster pace than brick-and-mortar competitors, while also gathering user data more efficiently. Furthermore, SoFi leverages its AI algorithms to improved tech-enabled services, aiming to eventually replace the need for separate banking and investment apps.
Still on an upward growth trajectory
SoFi's membership base grew from 2.52 million at the end of 2020 to 9.37 million in Q3 2024. Its product offerings also increased from 1.85 million to 13.65 million during the same period.
From 2020 to 2023, its adjusted revenue increased by a compound annual growth rate (CAGR) of 49% from $621 million to $2.07 billion. It turned a profit in 2021, reporting $30 million in adjusted EBITDA, which grew by a CAGR of 279% to $432 million in 2023. SoFi has also maintained profitability according to generally accepted accounting principles (GAAP) over the past four quarters, with expectations for a full-year GAAP profit in 2024.
Although its growth was remarkable, it set a high bar during its pre-merger presentation. It claimed it would generate $2.11 billion in adjusted net revenue and a positive adjusted EBITDA of $484 million in 2023.
Facing fewer challenges in the short term
Two primary challenges caused SoFi to miss its initial estimates. Rising interest rates made its new loans less attractive, and its student loan business suffered from a near four-year federal freeze on student loans from March 2020 to September 2023. During this time, loan payments were frozen for eligible students, and the interest rate was set at 0%.
However, these challenges are beginning to subside. The U.S. Federal Reserve lowered interest rates three times in 2024 and anticipates at least two more rate cuts in 2025. Furthermore, SoFi's student loan business is recovering, as the federal loan freeze ends.
SoFi has also expanded its digital fintech ecosystem. In 2020, it acquired the fintech company Galileo. Galileo now provides payment processing, card issuing, and other services to over 100 companies in 16 countries, hosting more than 160 million accounts and accounting for 10% of SoFi's contribution profit in 2023.
Lastly, SoFi signed a $2 billion deal with Fortress Investment Group in October 2023 to underwrite its loans and transfer them to other lenders. This deal could help SoFi generate additional fee-based revenue without increasing its leverage.
Is SoFi's stock a worthwhile investment right now?
For 2024, SoFi projects its adjusted revenue to grow by 22%-23% and its adjusted EBITDA to increase by 48%-49%. From 2023 to 2026, analysts estimate SoFi's revenue to grow at a CAGR of 19%, while its adjusted EBITDA increases at a CAGR of 44%. On a GAAP basis, they predict its earnings per share to grow at a CAGR of 90% from 2024 to 2026.
These estimates should be treated with caution, but SoFi may have ample room for future growth as it attracts more customers away from traditional banks. However, it currently trades at a premium compared to slower-growing competitors. SoFi's price-to-book ratio is 2.8, while Bank of America and Wells Fargo have lower ratios of 1.3 and 1.5, respectively.
Yet, SoFi may not be overvalued considering its growth potential. At $16, it has an enterprise value of $16.2 billion – valuing it at 5 times next year's sales and 18 times its adjusted EBITDA. At $20, it would trade at 7 times next year's sales and 22 times its adjusted EBITDA. Therefore, SoFi's stock may be an attractive buy below $20 as investors look the other way.
In the context of SoFi's financial growth, investors might consider the potential for further investment opportunities, considering its projected revenue increase of 22%-23% for 2024 and a potential adjusted EBITDA boost of 48%-49%. Despite its current trading price of around $16, some analysts argue that its enterprise value of $16.2 billion, representing 5 times next year's sales and 18 times its adjusted EBITDA, could make it an appealing buy below $20.
In light of SoFi's success in securing a U.S. bank charter and its digital-only direct bank launch, along with its increased membership base and revenue growth, some investors may consider allocating a portion of their finance portfolio for investing in SoFi stocks, hoping for the stock price to reach its estimated projections.