Traditional banks are known for poor customer service, long waits, and call centers, which is why so many fintechs like SoFi Technologies (SOFI -0.13%) are sprouting up. Investors have cooled on SoFi's stock, a decline that could be a result of low interest rates hurting lenders and investor sentiment turning against SPACs (special purpose acquisition companies) and riskier growth stocks in recent months. Investors may have the wrong idea about SoFi, and here are three reasons why.
1. Growth is accelerating
SoFi got its start in student loans, but it's evolved over the past two years to develop a finance "super app" that lets consumers service all of their money needs. Within SoFi's app, you get:
- SoFi Invest: to buy stocks, trade crypto, and automate investing.
- SoFi Money: to deposit, save, and spend your money.
- SoFi Relay: to track and manage your credit score, spending, and personal finances.
- SoFi Loans: for borrowing via credit cards, personal loans, student loans, and mortgages.
SoFi is currently the only company with an A-to-Z offering within a single app, which sets it apart from traditional banks and other fintech competitors such as Square and PayPal.
Image Source: Getty Images
SoFi's strong reputation in the student loan category attracts users who then pick up other financial products across the app. As of the first quarter of 2021, SoFi has a total of 2.28 million members, up 110% year over year, and it was the company's seventh consecutive quarter of accelerating user growth. The number of products used on SoFi's app grew 273% year over year in the first quarter, indicating that members are starting to use more products across the app after joining.
2. A bank charter could improve profitability
The U.S. financial services market is worth more than $1 trillion. But competition is intense, from both traditional banks and fintechs. Banking employs roughly the same business model all over (money is lent in return for interest), so lowering the cost to acquire customers is a necessity.
SoFi and other fintechs don't have branches and overhead like traditional banks, so digital banks have much lower customer acquisition costs. On average, a traditional bank pays between $1,500 to $2,000 to acquire a retail banking customer. In comparison, SoFi pays just $40 on average due to its digital presence and ability to cross-sell products to users from within its app.
The company recently acquired Golden Pacific Bancorp, a community bank, for $22.3 million as part of its effort to secure a national bank charter. SoFi currently uses third parties to underwrite its loans, which is less profitable, but it would bring that in-house with a charter, using member deposits to fund its lending, as traditional banks do. Management anticipates that this would increase the company's total EBITDA (earnings before interest, taxes, depreciation, and amortization) over the next five years by another $1 billion.
3. Galileo makes SoFi diverse
In 2020, SoFi paid $1.2 billion to acquire Galileo, a payment software company that connects banks to credit card processors. It provides important infrastructure for many of SoFi's fintech competitors, including Robinhood, Chime, Monzo, Varo, TransferWise, and others. Galileo is best thought of as a "toll road" that benefits from the growth of the overall fintech space, which SoFi now benefits from.
Galileo is growing rapidly, with year-over-year account gains of between 130% to 135% over each of the past three quarters. It now has 70 million accounts, growing almost fourfold from just two years ago.
It currently contributes roughly 20% of SoFi's total revenue, giving investors both diversification and exposure to the broader fintech industry.
SoFi looks like a bargain
SoFi is forecasting 58% revenue growth in 2021, hitting $980 million for the full year. The stock's market cap of $13.2 billion values it at a price-to-sales ratio of 13. It trades at a premium to traditional banks (which have a low-single-digit P/S on average) and also to Square, which trades at a P/S of 10.
SoFi may not look like a bargain in this light, but the company is forecast to grow revenue 43% per year over the next five years. Its smaller market cap gives it room to grow as a stock over the long term.
SoFi's lending business and Galileo are already profitable, but its financial services (the super app) are expected to burn $138 million this year. As SoFi gains and cross-sells to users, its low customer acquisition costs could push it to profitability, which management estimates will happen in 2023.
Investors will want to give the company time to execute while keeping an eye on user growth and losses from financial services. SoFi could become extremely profitable over the long term and would only be helped by obtaining a bank charter. If these things happen, investors could someday look back fondly on when SoFi was this cheap.
