Shares of financial technology company and digital bank SoFi Technologies (SOFI -0.13%) have fallen more than 70% from their highs; surely something must be wrong with the business, right? The ongoing student loan freeze hurt the company, but is that a reason to avoid the stock?
Peel back the onion layers and you'll see that SoFi's business is arguably more robust than ever, despite the stock price woes. Here are three reasons it could be a huge winner when investor sentiment toward the market eventually turns positive again.
1. Customers seem to love SoFi's product
Banking is one of the world's oldest industries, and traditional banks have ruled that roost for centuries. There are more than 11,000 banks and credit unions in the United States, and the largest financial institutions have branches and ATMs throughout most major towns and cities.
But digital banks like SoFi are steadily changing the game; they don't have the massive network of physical locations that traditional lenders do. Instead, they were born and operate on the internet; trying out SoFi is as easy as downloading an app to your smartphone. It started in student loan refinancing, so the company gets exposure to students and young professionals, a demographic that typically embraces digital products more than older generations.
These younger users gravitate to its platform; the company is rapidly adding members, more than tripling to 4.3 million from the second quarter of 2020 to the second quarter of 2022.
SoFi is growing by taking users from other banks. Investors will want to monitor member growth each quarter, which still appears strong with a 69% year-over-year increase in the second quarter of this year.
2. A diverse product with cross-sell opportunities
One of SoFi's key features is its app, which it has positioned to be a one-stop shop for all your financial needs. The app offers peer-to-peer payments, direct deposits to various accounts, loans, financial education, and more.
For consumers with different apps for their banking, credit card, investment, and student loans, SoFi wants to simplify their finances. SoFi even gives members points for doing more on the app, which they can exchange for rewards.
The super-app potentially lowers customer acquisition costs, one of the most significant expenses for traditional banks. If customers refinance student loans through SoFi and get on the app, they might see the other services it offers -- free advertising for the company's other products.
An ecosystem like this, similar to what Block is doing with its Cash App, gives SoFi a leg up on traditional lenders operating on a business model that existed before the internet. In other words, it's hard for them to quickly change and adapt to digital fintech competition.
SoFi's cross-selling is working, as shown by the numbers. Membership grew 69% year over year in the second quarter of this year while the number of products that customers have used grew 79%. This happens when members join the app for one product and find others they like once they get into the ecosystem.
3. An ample opportunity for investors
A big winner in the financial industry can be a tremendous long-term investment because the industry offers near-limitless opportunities. According to industry estimates, the global financial services sector is worth roughly $25 trillion today and could grow to $37 trillion by 2026.
The U.S. population is about 335 million, and SoFi has just 4.3 million members. That leaves lots of room to grow in the U.S. and could eventually break into international markets as it becomes more established.
The long-term growth trajectory could last for decades if SoFi can keep executing and appealing to consumers. You don't need to worry as much about competition when the pie is large enough to reward multiple winners.
Investors will want to monitor growth in membership and products since that is the ultimate indicator of the business' trajectory. SoFi has a lot of potential, which could mean big investment returns if investors can endure the short-term pain of an irrational market.
