SoFi Technologies (SOFI -3.74%) stock is finally back in the market's favor after declining for most of the year. SoFi doesn't fit neatly into a particular box; it's a bank, but not quite a bank stock. It's a tech-driven company, but a lot more. In some ways, it almost defines the fintech category, but it defies conventional labeling because its banking business provides a lot more stability than the classic fintech.
So it isn't surprising that the market doesn't always know what to make of it. It's been fairly volatile since its initial public offering, and that's happening now. After falling for most of 2024, it's doubled over the past three months.
There's a lot to unpack with SoFi. Let's jump in and try to make sense of the company and whether or not you should buy the stock now.
The fintech bank stock
SoFi, a fully digital bank, has consistently shown impressive growth and success in recent years. It started as a student loan cooperative and still targets the student and young professional demographics. It's an excellent niche that's ripe for picking, because these younger users don't necessarily relate to big, established banks that could offer intimidating and complicated services. SoFi aims to be the opposite of that -- everything is online and easy to use, and it's establishing its brand as the go-to for simple and functional financial services.
This is drawing attention, and members have been joining at a rapid pace. There were 756,000 new members in the third quarter for a total of nearly 9.4 million, and that's how it's been going for years already.
Image source: SoFi.
SoFi often touts its strategy of hooking younger customers with its ease of use, high rates, and low fees, and keeping them in the SoFi ecosystem as their needs evolve and increase. That leads to high engagement rates, more product adoption, higher sales, and scale. It added 1.1 million products in the quarter for a total of 13.7 million.
Revenue growth accelerated in the quarter to 30% year over year, and that spilled into increased profitability. Net income was $58 million in the quarter, up from a loss last year, and it was the fourth consecutive quarter with positive net income on a generally accepted accounting principles (GAAP) basis. Management is guiding for further strong growth and positive profits for the full year.
More to the story
That's a simplified version of what's going on, true as it may be. Here are some of the deeper and more complex layers that the market is watching and factoring into SoFi's stock price.
SoFi is at its core a lending company. It has diversified into financial services and a white-label financial infrastructure business, but lending still accounts for the bulk of its business. The cross-selling strategy is working, but it's not just a way to generate higher revenue and increase engagement. It's been vital to the company's performance during a period of high interest rates and pressure in lending.
For the past few quarters, management had warned that lending revenue for the year would be below 2023. Since lending is still most of the business, that was a letdown. Lending also accounts for most of the profits. So even though on a consolidated basis the company has been profitable, it was a precarious profitability.
The non-lending segments continue to grow as a percentage of the whole, and they were both profitable in the third quarter. Together, financial services and tech platform were 49% of total adjusted revenue. The financial services segment has been outstanding, increasing 102% in the quarter, and management expects it to increase 80% for the full year. It also raised guidance across the board, and it now expects lending revenue to at least match 2023 levels. With interest rates finally being cut, that could generate even better results in the lending business in the near term.
Where the stock is going
If SoFi was valued like a regular bank stock, it would be astronomically expensive at the current price. It trades at a forward one-year P/E ratio of 60, whereas the typical bank trades for around 10. Banks are also usually valued by a price-to-book value, and a ratio higher than 1 could be expensive. SoFi's price-to-book ratio is 2.6.
But the market understands that SoFi is a tech stock, and a growth stock. It's still in an aggressive growth stage, with high capital expenditures to capture market share and develop its platform. Most banks operate with lower growth rates, and their size allows them to easily cover their expenses with revenue.
Since SoFi is expected to keep growing at high rates, it can carry a higher valuation. At the current price, there's enough room for SoFi stock to climb without becoming unreasonably expensive, and investors can feel comfortable taking a position right now if they plan to hold for the long term.
