SoFi Technologies: A Rising Star in Digital Banking Investment
Cathie Wood, renowned for her bullish outlook on Tesla and Palantir, is making waves as she quietly accumulates shares in SoFi Technologies (NASDAQ: SOFI). Currently, this fintech company ranks as her fourth-largest investment in her portfolio of exchange-traded funds (ETFs). Wall Street shares this optimism, with Mizuho equity analyst Dan Dolev recently bumping his price target for SoFi to $14 per share, representing a 36% upside based on prices recorded on Oct. 29.
This analysis unpacks SoFi’s latest earnings report and highlights several favorable trends that could boost its growth further.
SoFi Delivers Impressive Earnings Results
You might question SoFi’s potential as an investment given the crowded financial services landscape. Competing with giants like Wells Fargo and Bank of America seems daunting for smaller players like SoFi. However, the rise of online disruptors like Robinhood Markets, Coinbase Global, and Block shows that new companies are challenging traditional banks effectively.
SoFi has emerged as a significant player in the digital banking arena. Unlike larger institutions, SoFi operates purely online, providing loans, insurance, banking, and investing services exclusively through its app.
Digital banking is gaining traction, and SoFi is at the forefront. As of September 30, the firm reported 9.4 million members—up 35% from the previous year. Impressively, these members are using over 13.6 million products, indicating that each member utilizes an average of 1.5 services, showcasing SoFi’s skilled cross-selling abilities.
This opportunity positions SoFi to become a comprehensive financial services platform, potentially enhancing its long-term profitability.
In the third quarter alone, SoFi’s revenue grew by 30% year over year, reaching $689 million, alongside generating over $60 million in net income—marking its fourth consecutive profitable quarter.
Image Source: Getty Images.
Looking Ahead: The Prospects for SoFi
It’s evident that SoFi is effectively establishing a strong financial services platform. While increased revenue and consistent profits have become commonplace in its earnings reports, it’s essential to recognize that this growth story is just beginning.
The lending products are SoFi’s primary revenue source, but historically high-interest rates have posed challenges. However, a few key factors are worth noting.
Firstly, despite stagnant growth in SoFi’s main income stream in recent quarters, the company still managed modest profitability, indicating a rising dependency on its platform for various financial needs.
Secondly, the Federal Reserve appears inclined to continue lowering interest rates after its September cut. The recent 50-basis-point (0.5%) reduction has already revitalized SoFi’s lending segment, which generated $392 million in revenue—a 15% year-over-year increase.
Should these rate cuts persist, SoFi’s lending sector is likely to accelerate, potentially positioning the company for more profits and stronger operational footing.
Evaluating the Valuation of SoFi
Determining SoFi’s intrinsic value proves complicated at this stage. The traditional price-to-book (P/B) ratio, commonly employed for banking valuation, doesn’t fully capture SoFi’s multifaceted nature as a tech-oriented service. Moreover, its current earnings are still modest, making earnings metrics less applicable at this time.
This company resembles a tech-enabled service evolving into a versatile platform with diverse financial offerings. Thus, utilizing a sum-of-the-parts (SOTP) valuation methodology seems more fitting.
As SoFi expands its non-lending offerings, it could report improved margins and better profit and cash flow growth. Consequently, applying technology and software industry multiples to its valuation would be more suitable than conventional banking metrics.
For these reasons, I align with Wood and Dolev’s optimistic projections for SoFi’s stock. Presently, it might be a strategic move to invest in SoFi’s shares, holding for the long term as it embarks on a new growth phase driven by a rising customer base, increasing revenue, and improved profits.
Should You Invest $1,000 in SoFi Technologies Now?
Before proceeding with an investment in SoFi Technologies, consider this:
The Motley Fool Stock Advisor analyst team has identified what they believe are the 10 best stocks to buy at this time, and surprisingly, SoFi isn’t one of them. These selected stocks hold the potential for substantial returns over the next few years.
Consider Nvidia’s example. Had you invested $1,000 when it was suggested on April 15, 2005, your investment would now be worth $853,860!*
Stock Advisor provides a straightforward roadmap for investors, including portfolio-building tips, consistent analyst updates, and two new stock picks each month. Over time, this service has more than quadrupled the return of the S&P 500 since its inception in 2002*.
View the 10 stocks »
*Stock Advisor returns as of October 28, 2024
Wells Fargo, Bank of America, and JPMorgan Chase are advertising partners of The Ascent, a Motley Fool company. Adam Spatacco holds positions in Block, Coinbase Global, Palantir Technologies, SoFi Technologies, and Tesla. The Motley Fool endorses Bank of America, Block, Coinbase Global, JPMorgan Chase, Palantir Technologies, and Tesla. For more info, see their disclosure policy.
The views and opinions expressed herein belong to the author and do not necessarily reflect those of Nasdaq, Inc.
