Financial technology (fintech) disruptor SoFi Technologies (NASDAQ:SOFI) stock is up over 20% year-to-date. However, since early June SOFI stock has lost about 35% of its value.
On June 1, the company went public through a reverse merger with Social Capital Hedosophia Corp., a special purpose acquisition company (SPAC). SOFI stock ended its first day at $22.65. After trading between $20 and $25 for the first few weeks, SOFI shares plunged 20% in July. The stock price currently hovers around $15.
Now, investors wonder whether they should invest in SOFI stock. Long-term investors with a two- to three- year horizon should consider buying the shares. Here’s why.
SOFI Stock Has Room To Grow
SoFi has a compelling mission statement. The company aims to help people “reach financial independence to realize their ambitions,” by making their money “work for the life they want to live.” Founded in 2011 as a student loan refinancing business, the company has evolved to become a fintech disruptor over the past decade.
The group currently offers a multitude of financial products, delivered through a single app, which allows consumers to borrow, save, spend, and invest money. Users can also track their credit scores and manage their spending and personal finances.
Unusual provisions in Sofi’s lock-up agreement triggered an early end to its lock-up period, flooding the market with new shares from insiders. Low interest rates and investor sentiment that turned against riskier growth stocks also contributed to the recent pullback in SOFI stock.
Yet, SoFi is currently firing on all cylinders. Moreover, its smaller market cap provides the company with room to grow in the long term. Trading at a $12.6 billion valuation, Sofi is a new-age financial platform poised to generate lucrative returns for its shareholders.
How SoFi’s Quarterly Earnings Came
Sofi Technologies issued blowout first-quarter financial results in late May. Adjusted net revenue came in at $216 million, a 151% year-over-year (YOY) increase. In other words, it should be able to reach or possibly surpass $1 billion in an annual revenue for FY21, meaning an increase of well over 55% YOY. The company reports revenue in three segments:
- Lending (revenue of $168,037 milion);
- Technology Platform (revenue of $46,065 million);
- Financial services (revenue of $6,463 million).
Analysts also noted total members jumped 110% to reach 2.28 million. The fintech company generated its third consecutive quarter of positive adjusted EBITDA, paving the way for future profitability.
Due to its heavy investment in its financial services platform, the company is currently losing money on a GAAP basis. However, it is on a path to profitability as management scales operations.
SoFi is Firing on All Cylinders
Management indicates that members start to use a wider range of products within the app once they join. Sofi is betting that the more products customers use, the better the customer experience becomes, eventually making it harder for clients to leave the platform.
Such cross-selling will likely boost unit economics. While SoFi’s money products yield a 34% profit margin, the figure skyrockets to 80% when combined with a personal loan product. Selling a second product to a user does not require an incremental investment. Hence, digital financial groups have much lower customer acquisition costs compared to traditional banks.
In 2020, SoFi paid $1.2 billion in 2020 to acquire Galileo, a payment software company that offers companies the capability to develop payment, card, and digital banking products. Analysts consider Galileo as a “toll road” that is poised to benefit from the growth of the overall fintech space.
Q1 saw total Galileo members skyrocket 130% YOY to reach 70 million. In addition, the platform provides crucial infrastructure for SoFi’s fintech competitors,including Robinhood (NASDAQ:HOOD), Chime, Transferwise, and Chime.
In addition, SoFi recently acquired Golden Pacific Bancorp (OTCMKTS:GPBI) to gain a national bank charter that would allow the company to use member deposits to fund its lending. SoFi currently utilizes third parties to underwrite its loans, which is less profitable. Management forecasts that this would increase the company’s total EBITDA over the next five years by another $1 billion.
The Bottom Line on SoFi Stock
SoFi is already well-known in the student loan category. But those users then become customers for other financial products. As a result, the group is growing rapidly in the fintech industry.
The lending business and Galileo are already profitable. Yet development costs are hitting the bottom line in the short term. However, as it continues to cross-sell its services, SoFi should become highly profitable in the not-so-distant future. The recent pullback in SOFI shares currently presents a valuable opportunity for long-term investors.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
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