Bank stocks as a category usually provide certain benefits for investors that are different from other kinds of stocks. They're usually cash-rich, established companies that provide protection in volatile markets, and they often pay dividends.
But if you're looking for a great bank stock to invest in right now, I have a different kind of bank in mind. SoFi Technologies (SOFI -3.74%) is a mid-sized bank that's all digital, and it's a tech-first company, or a classic fintech. It's young, only recently profitable, it doesn't pay any dividends, and it could be the best bank stock to buy right now if you have $200 available to invest.
What's so fine about SoFi
SoFi has its roots as a loan co-op started by college students, and student loans remain a core part of its business. However, it's expanded into all kinds of loan and financial services, and it's emerging as a powerhouse bank servicing students, young professionals, and anyone looking for an easy-to-use digital banking app.
And there are a lot of these users signing on. SoFi is enjoying high growth throughout its system, with robust membership signups and product add-ons.
Image source: SoFi.
Sales growth accelerated in the third quarter to 30% year over year, and the non-lending segments are contributing more and more to that growth. That's important because the lending business is very sensitive to interest rates, and with volatility in interest rates, the lending business has been under pressure.
In the third quarter, the non-lending segments, which are financial services and tech platform, accounted for 49% of total revenue, up from 39% last year, and they increased 64% year over year.
Risks and opportunities
SoFi has so much potential. As more members sign up and engage with more products, the company is scaling and reaching real profitability. It has reported positive net income for four quarters now, and it's expecting that to be a given at this point going forward. Net income was $61 million in the third quarter, up from a $267 million loss last year.
However, it's not without risk. A lot of that risk right now is coming from the sensitivity in lending. Lending still accounts for most of the revenue, although the other segments are quickly catching up. However, it's still responsible for the bulk of the profits, and it's slower-growing. Lending contribution profit increased 17% in the third quarter over last year to $239 million. Financial services contribution profit increased 42% to $100 million, and tech platform contribution profit increased 32% to $33 million.
It's only a matter of time until the other segments carry more of the weight here. And in the meantime, as interest rate come down and SoFi's reaps the benefits, its risks are looking less exstreme.
In the near term, there's risk because SoFi is young and just out of the stage of getting its feet wet. But its track record so far has been very positive, and in 10 years from now, it should be a much bigger bank, with the stability that comes along with that.
SoFi stock could soar
SoFi stock might look expensive at first glance. It trades at a P/E ratio of 160, and a price-to-book ratio of 2.8. But since it's a high-growth stock and a tech stock, it's reasonable to be more expensive than a slow-growing bank stock. And in any case, according to some valuation metrics, it's actually in line with some of the bigger banks.
SoFi stock doesn't offer the same protection and reliability as most established bank stocks. But it does offer high growth, and in 10 years from now, your $200 could be worth a lot more than it is today, and it could appreciate a lot more than any other bank stock.
