SoFi Technologies (SOFI -3.71%) has taken shareholders on a volatile ride. At its 52-week low in August, shares were 75% below their all-time high. However, things have improved dramatically in recent months.
This fintech stock has surged 154% since that low. Perhaps the market is turning optimistic about the prospects of a more favorable economic backdrop that can boost growth.
But as we look to the future, can SoFi shares be a millionaire maker?
Growing at a brisk pace
SoFi has found tremendous success since it was founded in 2011 as a provider of student loan solutions. The business is disrupting financial services, now offering a range of products and services in a fully digital format. Management's focus has centered on providing an exceptional customer experience.
This has led to fantastic growth. Revenue in Q3 (ended Sept. 30) was up 30% year over year and 156% more than the same period three years ago. SoFi's customer base now totals 9.4 million. That's 35% higher than it was just 12 months ago. The company is clearly doing something right to expand its user base quickly.
Looking ahead, executives believe SoFi will be able to grow revenue at a compound annual rate of 20% to 25% between 2024 and 2026. Product innovation and cross-selling opportunities are key factors driving the company's expansion.
SoFi has been able to attract customer deposits in remarkable fashion. It currently has $24.4 billion in deposits, significantly higher than the $7.3 billion total at the end of 2022 just before the regional banking fiasco. Offering a high yield on its savings account, as well as expanded FDIC insurance, helps drive customer trust. This increasing deposit base provides funding that SoFi can use to grow its loan book, which can support higher revenue potential over time.
Generating positive earnings
SoFi has typically spent a lot of money to improve its product offerings and on sales and marketing to attract new customers. As a result, the business hasn't been profitable in the past. Things are starting to change for the better.
By deliberately choosing not to operate a physical bank branch network, SoFi is able to control overhead expenses. It's working well as the company has now reported four straight quarters of generally accepted accounting principles (GAAP) net income.
Management believes the good times will continue. It predicts that earnings per share (EPS) will increase from an expected $0.11 to $0.12 in 2024 to $0.68 (at the midpoint) in 2026. And then after that, the belief is that EPS will rise at a 20% to 25% yearly pace. These forecasts are exciting for investors.
High expectations
At the 52-week low, SoFi shares traded at a price-to-sales (P/S) ratio of 2.8, which was an attractive entry point. After the stock's incredible run, the situation has gotten expensive. As of this writing, SoFi stock is trading hands at a P/S multiple of nearly 7.
SoFi's elevated valuation makes me think that the stock isn't as compelling of a buying opportunity as it was a few months ago. That's not a bold statement, especially after the shares have climbed 154%. Clearly, the market has become very optimistic about the company's prospects.
All else equal, investors should prefer paying a lower valuation multiple because it represents subdued expectations the market might have. Consequently, there is added upside if the underlying business performs well, which can improve the valuation ratio. The steep valuation is a key reason I'm not a shareholder.
However, if you have strong conviction that SoFi still has a long runway ahead of it to grow its revenue and customer base, while also increasing its earnings at a rapid clip just as management believes, then you should consider buying it. And if you're able to invest more money upfront and extend your time horizon, then maybe SoFi stock could eventually turn you into a millionaire.
