Every investor is looking for the next Apple or Nvidia. Putting even a small amount into either of those stocks when they were just starting out would give investors staggering results today.
That's why it's so important to have a diversified portfolio of excellent stocks. You only need one to take off to create incredible market success, but you won't which one it will be.
SoFi Technologies (SOFI -3.74%) is a young fintech superstar. Could SoFi stock set you up for life?
Why SoFi looks so compelling
SoFi is an online bank, and it's part of a wave of all-online banks that are challenging the traditional, large banks. CEO Anthony Noto has the ambitious goal of becoming a top-10 bank, and if continues to grow the way it is right now, that could eventually happen.
Customers are signing up at a fast pace. There were 756,000 new members signups in the third quarter for a total of 9.3 million, and 1.1 million new products, for a total of 13.6 million.
Why do customers like it so much? It targets a student and young professional consumer base, and it speaks their language. Unlike the bigger banks, that have had to move online, SoFi was born online and is all digital. It has an easy-to-use interface, and for the younger customers who are making the intrepid move to managing their own finances for the first time, it simplifies the process.
As customers discover and enjoy the platform, they're signing up for more products, which is another growth driver. SoFi was originally a loan co-op, but it has expanded into a broad assortment of financial services products. It's benefiting from this strategy in many ways, from lowering its risk to increasing engagement to generating higher sales.
In the third quarter, revenue increased 30% year over year. Another benefit of the expansion strategy is that it's leading to scale, and SoFi has reported positive net income for four consecutive quarters. It's guiding for that to continue in the first quarter and in 2025.
What to watch out for
As wonderful as this all sounds, and is, there are still risks. SoFi is still young and largely unproven, although it's doing an excellent job of proving itself. Four quarters of profitability is a sign that it's a viable company, but it doesn't yet have the same decades of operation that make some bank stocks incredibly stable and reliable.
Some of the good performance is coming from external factors, and investors shouldn't ignore that. As a financial stock, SoFi's business is highly impacted by the macroeconomy and interest rates. Higher interest rates have affected many banks negatively over the past few years, SoFi included.
While the consolidated results are strong, the lending segment has been under pressure. Revenue was decreasing at one point this year, and management warned that full-year lending revenue would be lower year over year. As interest rates go down, results have been better than expected, and management revised its guidance, much to the relief of investors.
This is why the expanded platform has been even more important for SoFi. Even as lending was precarious, you wouldn't know it from seeing the total results.
As interest rates come down, SoFi and SoFi keeps bringing new members on board for various products, it's well-positioned to keep growing, and for its stock to keep gaining.
One other factor to keep in mind, though, is SoFi's valuation. At its lows earlier this year, SoFi stock was looking like quite the bargain. However, now that it's climbing back up, so is its value. As of this writing, SoFi stock trades at a forward, 1-year P/E ratio of 65. That's not cheap, but for a growth stock, it could be a justified premium. It trades at a price-to-book ratio of 2.7. That's also not cheap as compared with other banks, but other banks aren't growing as fast as SoFi. So, while I couldn't call SoFi a bargain at this price, I wouldn't say it's overvalued, either.
Never count on one stock setting you up for life
If SoFi continues to grow at double-digit rates, its stock should keep climbing for the foreseeable future. Management is guiding for 22 to 23% growth in 2024, and Wall Street sees revenue increasing another 17% in 2025. As net income increases, the valuation should recede to more reasonable levels, and shareholders should enjoy years of compounded stock gains.
If you invest enough money in SoFi stock, it could be a strong element of a well-diversified portfolio and help set you up for life. I don't recommend putting all your eggs in one basket, but I do recommend buying SoFi stock and holding it for many years.
