After an initial phase of high ups and downs, SoFi Technologies (SOFI 0.56%) has been on a roll, and SoFi stock is up 120% over the past year. That's a phenomenal gain, and somewhat surprising, given that it was much lower for most of last year.
Like any new stock, and really any stock at all, its business was impacted by macroeconomic volatility, and its recent improvement is also due to the external tailwinds of lower interest rates. No one can know what kind of world events could affect its business over the next five years, but given some more ups and downs, and knowing that the economy tends to do well more often than not, let's see where SoFi might be in five years from now.
Revenue and users
Something the online bank has done consistently since it went public a few years ago is grow its revenue and user base at a high rate. Sales growth has decelerated as the company grows, but it's firmly in the double digits, and it has added millions of users.
In the third quarter, revenue increased 30% year over year. It added 756,000 new members and 1.1 million new products.
Over the next five years, I would imagine that users continue to flock to the platform and it keeps up growth, but it could keep decelerating. Last year, management gave a longer-term outlook of 20% to 25% sales growth through 2026, and it could move into the teens after that. In general, management has been conservative in its guidance, and it tends to beat expectations.
Lending and the expanding platform
SoFi's roots are in student lending, but it's taken a number of actions over the past few years to expand its platform and offer a full slew of financial services on its app. It got a bank charter in 2022 when it acquired Golden Pacific Bancorp, and it acquired Galileo, a financial services infrastructure for enterprise clients, in 2020, which it calls its tech platform.
Lending is still its largest segment, but the other two segments are increasing at a fast pace and accounting for more of the total. They increased from 39% of revenue last year to 49% this year in the third quarter, and financial services sales increased 102%. The financial services are all non-lending services, like bank accounts, investing, and credit card cards.
The lending segment has been under pressure in the high-interest rate environment, but management is expecting it to rebound. As it begins to grow again, it might stay as the largest segment, even though the other segments are faster growing.
Over the next five years, the lending segment may remain the largest one, but it will be well-balanced by the other segments.
Profits and margins
SoFi turned its first quarterly profit in the 2023 fourth quarter, and it's reported positive and growing net income since then. It operates a low-cost platform that's positioned to demonstrate robust profits at scale, and now that it's past that tipping point, it should continue to enjoy wider margins and higher earnings per share. Banks tend to be firmly profitable, and SoFi looks to be entering that phase.
SOFI Net Income (Quarterly) data by YCharts
2024 will be its first year of positive annual net income, and it will provide forward guidance in the fourth-quarter update, slated for Jan. 27.
The lending segment still contributes most of the company's profits, which is why its rebound is so important. Lending contribution profit was $239 million in the third quarter, a 17% year-over-year increase. Financial services contribution profit was $100 million, but it was up from $3 million last year. If it continues to grow at that pace, it will become much more important than the lending segment.
So is SoFi stock a buy?
SoFi stock ended up as a top performer last year, and it's not so cheap at the current price. It trades at a forward 1-year P/E ratio of 40 and a price-to-book ratio of early 3. If it continues to demonstrate robust growth, it could justify that premium and keep gaining even in the near term. Zooming out to five years from now, barring another global catastrophe, SoFi is well-positioned to grow and create shareholder value.
