Financial services are one of the world's largest industries, worth trillions of dollars. It's also one of the oldest, with a lot of traditional ideas about how to operate and how to make money. Financial technology companies like SoFi Technologies (SOFI 3.69%) are trying to do things differently and, as a result, are nipping at the heels of traditional banks.
But trying to change how banking is done hasn't been without its difficulties for this company since SoFi went public in June 2021. Share prices are down about 82% from their high point in early 2021 and now trade near all-time lows. What has the market so down on this stock in 2022? And more importantly, can it regain the market's confidence going forward?
Here is why SoFi's stock could shine like a diamond in 2023.
SoFi investors showing lots of uncertainty right now
SoFi is a digital bank, which means it doesn't have physical branches. Most members access SoFi using smartphones to access its Super App which provides the services SoFi offers. Those services include checking and savings banking, peer-to-peer payments, investing, and various loans like mortgages, student loans, and more.
SoFi was awarded a coveted banking charter earlier this year, but that was followed by some bad luck (especially recently). Its student loan business has effectively been frozen because the U.S. government told loan recipients at the start of the pandemic that repayment requirements were frozen and the government has yet to unfreeze the payment requirements. The freeze was supposed to end at the start of 2023, but President Joe Biden recently extended the freeze until the end of June 2023 after a federal court blocked his attempt to forgive up to $20,000 in debt among qualified borrowers. Biden is waiting for the case to be settled before ending the freeze. The loans don't accumulate interest during the freeze, so borrowers are not incentivized to refinance them until payments resume. SoFi can't do much to monetize student loans until the freeze lifts.
The cryptocurrency industry is also going through turmoil due to the collapse of FTX, one of the major exchanges. Following FTX's collapse, some United States senators called for greater scrutiny of banks that have crypto trading segments.
When SoFi got its bank charter, the Federal Reserve pointed out that some of the activities conducted by its crypto brokerage, SoFi Digital Assets, were impermissible for banks. SoFi was given two years to divest itself of the division or else get in compliance with the law. During that conformance period, SoFi was not supposed to expand its crypto offerings. The senators raised concerns because it seems SoFi expanded its crypto offerings by allowing customers to invest part of their direct deposits into crypto with no fees. SoFi also greatly expanded the number of cryptocurrencies it offers.
Crypto is a tiny part of SoFi's overall business; the fair value of all digital assets held for customers is just $132 million. Still, the idea of increased regulatory scrutiny isn't ideal.
The business keeps delivering where it counts
Investors should not disregard the headwinds SoFi faces, but they should also note the company's stellar performance it still manages to generate. SoFi is still consistently adding members over the past few years. Memberships increased 61% year over year in the third quarter of 2022 and now surpass 4.74 million.
Image source: SoFi Technologies.
Much of SoFi's growth comes at the expense of existing banks. Growth has slowed slightly as the base numbers get larger, but it's clear that SoFi maintains strong momentum, and investors should follow this moving forward.
The company's increasing profitability is another big positive for investors. SoFi generated a positive non-GAAP (adjusted) earnings before interest, taxes, depreciation, and amortization (EBITDA) of $30 million in 2021 and is guiding for between $115 million and $120 million in 2022. Getting the banking charter was a big help here; it allows SoFi to perform core banking functions like holding its deposits and loans instead of relying on a partner bank and giving them a cut. Investors should look for EBITDA to keep growing as members and revenue increase.
Bright future, cheap stock
Student loan payments should eventually resume, which will help SoFi. Cross-selling on SoFi's app could help lift revenue over time; the average member currently uses fewer than two products, so there's plenty of room to expand that, given all the Super App offers.
Meanwhile, SoFi's potential crypto investigation bears watching and is likely a big contributor to the stock price's fall this year. If SoFi can't get a handle on the situation and resolve it, the potential regulatory damage it could cause to SoFi's banking charter would be a big reason to revisit the investment thesis for this stock.
Still, the stock's brutal decline over crypto sort of flies in the face of the positive news and the real potential for the stock. While discouraging for investors, it seems Wall Street could be missing the mark here. At a price-to-book ratio lower than traditional banks like Bank of America, the stock appears beaten down into the gutter here:
SOFI Price to Book Value data by YCharts.
Given the immense growth potential that it has over the long term, SoFi seems like a favorable risk-versus-reward stock idea where the upside favors the long-term investor. The business must keep executing and stay out of regulatory crosshairs, but the stock does have the ingredients for a breakout in 2023.
