Growth investors have endured a fairly significant market downturn during the past few months. The Nasdaq 100, a good measure of large cap growth stocks, is down about 10% year-to-date. The overall decline has brought down the valuations of some great stocks and turned them into good buys.
One cheap stock you can't overlook right now is SoFi Technologies (SOFI 2.83%). This fintech is dirt cheap and a great buy at its present valuation.
SoFi has lost nearly half its value since November
SoFi is a digital lender and personal finance company that launched in 2011 but it has only been a public company since June 2021.Its services are delivered through its app, offering loans, mortgages, banking services, investments, personal finance tools, and direct deposits, among other services.
The fintech's stock price climbed to about $23 per share on Nov. 4, then began a rapid decline over the next three months. It was caught up in the overall market swoon that hit growth stocks and fintechs particularly hard. Since then, it's down about 45%. It's currently trading at a little more than $12 per share, down more than 20% year to date.
Anytime a stock drops that sharply, it's concerning -- especially when it's a young company that's not yet profitable. But there are three good reasons why investors should view this as a buying opportunity.
Three reasons to like SoFi
SoFi stands out in a crowded field for a few very good reasons. The first is its explosive growth. Its membership, customers who use their products, has doubled in the past year to about 3 million, as of the end of the third quarter. It was up about a half-million in the third quarter alone.
Total products, which are the total number of products and services that members use, has jumped 108% to about 4.3 million in the past year. That number rose 24% in the third quarter from the second quarter. That contributed to a 35% increase in third-quarter revenue to $272 million from a year earlier. SoFi is expected to report fourth-quarter and full-year numbers on March 1.
The second reason is SoFi's technology-services arm, a banking-as-a-service business, which is a key differentiator. In this business line, the company farms out its technology and expertise to other companies and organizations that want to provide their own digital-banking services.
It's been growing like wildfire, too. Sofi bought into this business when it acquired Galileo in 2020, and it's generated strong growth, with third-quarter revenue up 29% year over year to $55 million. This is not only a revenue generator on its own, but this business also opens up significant opportunities to cross-sell SoFi's lending and other products.
The third advantage is SoFi's recent bank charter, which it received through its acquisition of Golden Pacific Bancorp, which closed on Feb. 2. This is a big deal because it's rare for a fintech to get a bank charter, although there are a few. But this opens many new doors.
A bank charter lets SoFi hold deposits, where previously it had to partner with banks to originate loans. Now, it can do so in-house, which means it doesn't have to share revenue. It also allows SoFi to set its own interest rates, whereas previously, it would have had to go through its bank partners.
With SoFi's low overhead, it could conceivably offer higher interest rates on customer balances, giving it a competitive advantage. The company also doesn't have to pay interest to bank partners to fund its lending activity. Moreover, because it can now hold loans on its balance sheet, it can collect interest throughout the life of the loan.
A great buy at a low price
The acquisition of Golden Pacific Bancorp give SoFi the opening to pursue its strategy of building a national digital bank, while maintaining the physical bank branches in California. It already announced that it will offer an annual percentage yield of as much as 1% on members' accounts, which is higher than the national average interest on balances.
Coming into a period with rising interest rates, with its bank charter, SoFi should be able to differentiate itself from its fintech peers with higher interest income. But it also has the banking-as-a-service business to diversify its revenue.
The company is still not profitable, and it may take a while for SoFi to gain its footing as a digital bank against a whole new set of competitors in the banking world. But it has a ton of brand recognition, particularly among younger adults, mainly because it started out exclusively offering student loans. SoFi has a lot of long-term potential, and at this reduced valuation, it's too cheap to ignore.