Down 39% From Its High, Is SoFi Stock a Good Buy Now?

Popular venture capitalist Chamath Palihapitiya took SoFi Technologies (SOFI -0.56%) public via special purpose acquisition company (SPAC) in June 2021. Its debut came amid a record year for initial public offerings (IPOs), which raised a collective $594 billion. Despite that enthusiasm, many newly public companies have struggled through the latter half of the year, and SoFi is no exception. The stock currently trades 39% below its all-time high.

However, SoFi is far from the only richly valued growth stock to see its share price plummet. And many of the driving forces behind the recent market volatility -- the omicron variant, high inflation, and potential interest rate hikes in 2022 -- are temporary in nature. With that in mind, is now a good time to invest in this fintech stock?

Let's dive in.

Image source: Getty Images.

A compelling business model

SoFi's mission is to help people realize their ambitions through financial independence. To that end, the company takes a comprehensive, mobile-first approach to consumer finance, aiming to simplify and personalize the experience of its members. That's particularly relevant because more than half of Americans currently use more than one bank, often because no single bank provides all of the necessary services.

That differentiates SoFi, which offers a robust portfolio comprising two product categories: lending solutions and financial services. The former category includes home loans, student loans, and personal loans; the latter category includes a money management solution (SoFi Money), brokerage services (SoFi Invest), cash-back payment cards (SoFi Credit Card), credit monitoring (SoFi Relay), and access to third-party insurance products (SoFi Protect). And all of those services are available through a single mobile app, which delivers personalized financial advice to each user every day.

Additionally, SoFi acquired Galileo in 2021, a fintech platform that provides digital banking services to other institutions. That includes the ability to create accounts, transfer money, process payments, and issue payment cards. And while Galileo may be an unfamiliar name to many investors, it powers 95% of digital banking in North America, and 70 of the top 100 fintech companies globally. What's more, Galileo complements SoFi Money, powering SoFi's own money management platform.

Collectively, management believes the market for financial services is worth $2 trillion, meaning there is plenty of room for multiple winners here. Even so, SoFi has differentiated itself from the competition.

A rapidly growing ecosystem

SoFi's comprehensive approach to consumer finance gives it an edge. Members can spend, save, borrow, invest, and earn interest through a single mobile app, and that streamlined user experience has translated into strong demand. In fact, SoFi's member base has grown by 90% or more in each of the last four quarters.

Additionally, SoFi benefits from vertical integration. The acquisition cost per product drops for members using multiple products, meaning SoFi becomes a little more profitable each time a member adds another financial service through its platform. And that's exactly what's happening. The number of products used by members has grown at a triple-digit percentage pace for the last five consecutive quarters, outpacing growth in total members.

Also noteworthy, the number of Galileo accounts jumped 80% in the most recent quarter, an impressive figure coming on top of 130% growth in the prior year. In short, SoFi's business is firing on all cylinders, and that has translated into strong revenue growth.

Source: SoFi SEC Filings. TTM = trailing-12-months.

As a caveat, SoFi generated a negative free cash flow of $152 million through the first nine months of 2021. However, given the massive market opportunity and the highly competitive nature of the industry, it makes sense to invest aggressively in growth. Even so, investors have reason to believe SoFi could achieve positive free cash flow in the not-too-distant future, as management is executing on a smart growth strategy.

A smart growth strategy

Specifically, SoFi has applied for its national bank charter, and to accelerate the process, the company announced an agreement to acquire Golden Pacific Bancorp in March 2021. That's particularly important because SoFi Money currently leans on third-party banks to provide cash management services to members. But a bank charter would allow SoFi to offer its own services, including deposit accounts, which would make its business more efficient.

For example, it would lower SoFi's cost to lend money, as the company could fund loans with capital from SoFi Money deposit accounts. In doing so, SoFi could offer lower interest rates to borrowers, and it could pay higher interest rates to SoFi Money account holders, enhancing its value proposition to a great many consumers.

On that note, recent comments from CEO Anthony Noto suggest that SoFi is nearing the end of the process. Investors should keep an eye on this situation, as it could be a game-changer for the fintech company.

A risk worth taking

SoFi currently trades at a price-to-sales ratio of 12.6. That's certainly not cheap compared to fintechs like Block and PayPal Holdings, which trade at 5.1 times sales and 9.1 times sales, respectively. However, SoFi's current valuation is cheaper than it has been for most of its history as a public company.

Moreover, management is executing on a smart growth strategy, and the breadth of SoFi's product portfolio sets it apart from many of its peers. That should help the company build a lasting relationship with consumers. To that end, I wouldn't be surprised to see this $15 billion company grow fivefold over the next decade, and I think it's OK to buy a few shares at the current price.