Ark Invest Chief Executive Officer Cathie Wood is known for taking large positions in emerging technology companies and making bold predictions about how disruptive these businesses will be. When it comes to fintech stocks, Wood's buying patterns are making one thing clear: She really likes SoFi Technologies (SOFI 3.69%).
SoFi falls under the category of a neobank. The company doesn't have physical brick-and-mortar locations akin to legacy players such as Wells Fargo. Instead, SoFi operates entirely online. While this digital approach to financial services may seem unconventional, it appears to be working.
Nevertheless, despite consistently solid earnings results, SoFi stock trades at rock-bottom levels. Let's dig into the company's operation and assess why the stock may be experiencing some depressed pricing action. Moreover, a thorough valuation analysis might suggest that Wood is on to something and that scooping up shares before 2024 could be a savvy move.
A strong operation with one noticeable blemish
SoFi offers its users many of the same services you'd find at other banks. The company specializes in loans to businesses and students, and it also has a budding mortgage platform. SoFi also has financial services, including the ability to invest in stocks and crypto directly from its app. By building such a vast library of products and services, SoFi is essentially trying to construct a flywheel business model. In other words, users who come to SoFi for one service -- say, a loan -- may find that they end up using other products on the app instead of turning to alternative financial institutions. By doing so, SoFi is theoretically able to generate strong customer lifetime value. While this business model makes sense, is it actually working?
For the quarter ended Sept. 30, SoFi boasted 7 million members on its platform, up 47% year over year. Moreover, the company disclosed that more than 10.4 million products are being used on SoFi -- implying that each member is using 1.5 services on average. The growth in its customer base and the obvious cross-selling translated into total revenue of $537 million during the third quarter, up 27% year over year.
On the surface, it appears that SoFi's business model is working. But there's one not-so-small blemish: SoFi isn't profitable. For the quarter ended Sept. 30, the company reported a net loss of $267 million. But as I wrote previously, taking the financial statements at face value can be deceiving. During the third quarter, SoFi incurred a goodwill impairment charge of $247 million. After backing this out of the equation, investors can see that the company really only burned about $20 million -- much better than the year ago period's net loss of $74 million.
Nonetheless, these trends show that even though the company has demonstrated that its product is in demand, SoFi has failed to show investors that the business model is a profitable operation.
Image source: Getty Images.
Will SoFi ever be profitable?
When doing due diligence on a company, one of the most helpful things investors can do is listen to earnings calls. This is when management teams reveal the themes influencing the business. From macroeconomic variables to more internal data points, earnings calls can be a terrific learning opportunity when studying a business.
Although many investors probably soured on SoFi after looking at the company's reported net loss, management's commentary gave me, as a shareholder, some reasons to be excited. During the earnings call, SoFi CEO Anthony Noto said, "We remain well on track for GAAP profitability for the overall company by Q4 and in the years that follow."
There it is. Noto is making it more clear than ever that SoFi is on the brink of consistent net profitability, without leaving out any of the inconvenient costs required in generally accepted accounting principles (GAAP) net income calculations. Should this come to fruition, SoFi stock could see some new life.
Should you invest in SoFi stock?
Image source: author.
Investors should zoom out and think about the big picture here. SoFi is trying to modernize banking and financial services by bringing a tech-enabled approach to the table. To do so successfully, SoFi needed to acquire a critical mass. Doing that costs a lot of money, especially when it's competing with bigger players that consumers are accustomed to using. For that reason, while SoFi's membership growth is impressive, the company has been required to invest heavily in sales and marketing. Moreover, building additional products and services into its app has proved costly. But after years of investing in the business, some long-awaited profits appear to be right around the corner.
Data source: YCharts
But with that said, SoFi stock trades at a price-to-book (P/B) multiple of just 1.5. Not only is that below the company's long-run average, but I'd argue that it's quite misleading. Price-to-book value is typically a good valuation metric to use when assessing banks. However, I see SoFi as much more than a regular bank and think of it more as a technology company.
I think now could be a lucrative time to open a position in SoFi stock. Should Noto's comments prove true, the company could report its first profit as a public company during Q4 earnings in early 2024. That could very well result in some renewed interest in the stock. With the shares trading below long-run averages and consistent profit within reach, now could be an amazing time to buy the dip.
