SoFi Technologies (SOFI -3.52%) hasn't impressed too many investors since its public debut. The fintech company went public by merging with a special purpose acquisition company (SPAC) on June 1, 2021, and its stock opened at $21.97.
But today, SoFi's stock trades at about $16. Like many other SPAC-backed companies, SoFi disappointed its investors by missing its ambitious pre-merger forecasts. Rising interest rates exacerbated that pressure by squeezing its valuations. That was a disappointing three-year return, but some Wall Street analysts are still bullish on the stock.
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Of the 19 analysts who cover SoFi, only three rate it as a sell. It already trades above the average price target of $11.66, but it's still below the top price target of $20. Should investors buy SoFi today and expect it to hit those Street-high estimates?
An early mover in the direct banking market
SoFi, which is short for Social Finance, was founded in 2011. It originally focused on providing more student loans than traditional banks, and it subsequently expanded its financial services business with more mortgages, auto loans, personal loans, credit cards, insurance services, estate planning, and stock investment tools.
In 2022, it obtained a U.S. bank charter and launched a digital-only direct bank. SoFi's digital-only approach enables it to expand more rapidly than its brick-and-mortar competitors. It also collects data more efficiently than traditional banks and accelerates, optimizes, and automates many of its fintech services with its AI algorithms. Over the long term, SoFi aspires to become a "one-stop-shop" for financial services that eliminates the need for separate banking and investment apps.
It's still growing like a weed
SoFi's number of members grew from 2.52 million at the end of 2020 to 9.37 million in the third quarter of 2024. Its number of products also grew from 1.85 million to 13.65 million during the same period.
From 2020 to 2023, its adjusted revenue rose at a compound annual growth rate (CAGR) of 49% from $621 million to $2.07 billion. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive in 2021 at $30 million, and that figure grew at a CAGR of 279% to $432 million in 2023. It's also stayed profitable on a generally accepted accounting principles (GAAP) basis over the past four quarters, and it expects to post a full-year GAAP profit for 2024.
That growth trajectory was impressive, but it set the bar too high during its pre-merger presentation. It originally claimed that it would generate $2.11 billion in adjusted net revenue with a positive adjusted EBITDA of $484 million in 2023.
But its near-term headwinds are dissipating
Two major headwinds caused SoFi to miss its original estimates. Rising interest rates made its new loans less attractive, and its student loan business struggled with a near four-year federal freeze on student loans from March 2020 to September 2023. During that time, loan payments were paused for eligible students and the interest rate was set at 0%.
But those headwinds are dissipating. The U.S. Federal Reserve cut interest rates three times in 2024, and it expects at least two more rate cuts in 2025. Its student loan business is also stabilizing as the federal freeze on student loans ends.
SoFi has also been expanding its fintech ecosystem. In 2020, it acquired the fintech company Galileo to provide its payment processing, card issuing, and other services to more than 100 companies in 16 countries. Galileo currently hosts more than 160 million accounts and generated 10% of SoFi's contribution profit in 2023.
SoFi has also been finding fresh ways to gain new customers without taking on more debt. This past October, it signed a $2 billion deal with Fortress Investment Group to underwrite its loans and offload them to other lenders. That deal could enable SoFi to generate more fee-based revenue without increasing its leverage.
Should investors buy SoFi's stock right now?
For 2024, SoFi expects its adjusted revenue to grow 22%-23% and its adjusted EBITDA to increase 48%-49%. From 2023 to 2026, analysts expect its revenue to grow at a CAGR of 19% as its adjusted EBITDA rises at a CAGR of 44%. On a GAAP basis, they expect its earnings per share to grow at a CAGR of 90% from 2024 to 2026.
We should take those estimates with a grain of salt, but SoFi could have plenty of room to grow as it pulls more customers away from traditional banks. But it also trades at a premium to those slower-growth rivals. SoFi has a price-to-book ratio of 2.8, while Bank of America and Wells Fargo have much lower ratios of 1.3 and 1.5, respectively.
Yet SoFi doesn't look too expensive relative to its growth potential. At $16, it has an enterprise value of $16.2 billion -- which values it at 5 times next year's sales and 18 times its adjusted EBITDA. At $20, it would trade at 7 times next year's sales and 22 times its adjusted EBITDA. Therefore, SoFi's stock could be worth buying below $20 as the bulls look the other way.
