Shortly after SoFi Technologies' (SOFI 2.24%) stock market debut in 2021, its share price more than doubled. Investors were responding to stellar results from the financial technology company and its rapidly growing consumer banking business.
Over the past couple of years, its performance has been nothing short of spectacular, but you wouldn't know it by looking at its stock chart. Its shares are about 74% below the high-water mark they touched last fall.
SoFi's share price may have gotten a little bit ahead of itself last year, but the company's business is stronger than ever. Here's why it's a high-growth stock that you can buy and hold with confidence.
Why SoFi stock has been battered
SoFi got started a decade ago by becoming the first company to refinance federal and private student loans. Naturally, the ongoing student loan payment pause has put a dent in that business, and it's unclear how long that will continue. In June, Secretary of Education Miguel Cardona told a Senate subcommittee that President Biden may further extend that repayment moratorium after the current extension period runs out at the end of August.
Prior to the pandemic, the company was refinancing around $8 billion worth of student loans per year. The possibility that Biden will offer significant debt relief to borrowers with federal student loans is no doubt giving many of them good reason to avoid privatizing those loans and refinancing them.
The market has also been punishing SoFi because the company is still in the high-growth, low-profitability phase of its existence, and interest rates are rising. And as interest rates rise, the present value of its far-future cash flows declines considerably.
Why SoFi's a screaming buy now
A diverse collection of revenue streams that are rising rapidly make SoFi one of the best bank stocks you can buy now. These days, it runs a comprehensive consumer bank through a single smartphone app. As of the end of March, it boasted 3.9 million customers, who on average used about 1.5 of its products each.
This February, SoFi became an actual bank with an approved bank charter by acquiring Golden Pacific Bancorp. Now, it can fund its own loans from customers' checking and savings account deposits, which currently offer depositors interest rates of 1.5% annually.
A banking charter isn't the only way this company has set itself up for long-term profitability. SoFi also owns and operates Galileo, the company behind the fintech industry's most valuable application programming interface (API). When new online financial institutions such as Robinhood or Dave want to open accounts, issue payment cards, or perform just about any other digital banking service, Galileo's API is what they use.
Galileo's API is also a hit with enterprise customers that operate outside the finance sector but that still want to offer their customers store-specific payment cards. At the end of March, SoFi's technology platform was enabling 110 million client accounts, up 58% year over year.
This year, SoFi acquired Technysis, a cloud-based banking platform that online banks use to manage loans, deposits, and other core functions. By combining Galileo with Technisys, SoFi has become the most vertically integrated fintech company around. This will give it opportunities to boost its profit margins in ways that its competitors can only dream of.
Image source: Getty Images.
Another in-house advantage
SoFi's in-house technology stack also includes a successful risk management platform. Instead of paying Fair Isaac for a three-digit FICO score, SoFi assesses potential borrowers based on its own algorithms.
Its platform gauges an individual's credit risk using far more data points than a FICO score measures. And with an approach similar to Upstart's, SoFi is leaning on artificial intelligence to improve its risk management chops. It's apparently working: In the first quarter, the fintech's personal loan delinquencies were at a record low.
Unlike Upstart, SoFi gets the full view when potential new members progress from application to income verification to approval. With all the data in hand, the company keeps tweaking the process. Its relatively painless loan application process has promoted its explosive membership growth and multi-product upselling.
Despite growing by leaps and bounds, Upstart is already breaking even on a non-GAAP basis. In fact, management expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to land in the $100 million and $105 million range this year.
A price that's more than fair
You might expect shares of a bank growing as quickly as SoFi to trade at a premium, but they aren't. The stock has been trading at around 1.06 times its book value. That's in line with the valuation of Bank of America and significantly lower than JPMorgan Chase.
There are no guarantees that SoFi will become a leading U.S. bank, but it's rapidly moving in that direction. Investors who buy the stock at its current knocked-down price have an incredibly good chance to outperform the market.
