Share prices of digital banking company SoFi Technologies (SOFI 4.40%) are on a tear, up more than 52% since the beginning of 2023. But don't worry if you've missed the party; it might not be over yet.
Regardless of whether you believe SoFi's stock should trade like a bank or tech stock, the valuation remains juicy -- even after SoFi's recent run. Now that positive catalysts are falling into place, investors can still ride a train that Wall Street analysts believe has more upside ahead.
Here is what you need to know.
The business and stock have moved in different directions
Sometimes, a stock and a business move in opposite directions. SoFi's stock continually plodded lower through most of 2022 as a bear market crushed investor appetite for growth names, especially those without bottom-line profits. But the numbers show that SoFi is anything but a meme stock or a flash in the pan.
SoFi is a digital bank that lets users bank, save, spend, borrow, and invest -- all through its smartphone super app. Additionally, SoFi owns Galileo, a fintech software business that gives companies the tools to build digital finance products, making it a pick-and-shovel play on the broader financial industry.
The company puts up strong growth just about everywhere you look. The stock peaked at roughly $25 per share in early 2021. SoFi had approximately 2.3 million customers using 3.2 million financial products and 70 million Galileo accounts as of Q1 2021. Those figures grew to 5.6 million customers using 8.5 million financial products and 126 million Galileo accounts in just two years. Despite such strong growth, the stock still trades about 73% off its former high.
| Risk- and Leverage-Based Capital Ratios and Amounts | Amount | Ratio | Required Minimum | Well-Capitalized Minimum |
|---|---|---|---|---|
| SoFi Bank | ||||
| CET1 risk-based capital | $1.437 billion | 13.3% | 7.0% | 6.5% |
| Tier 1 risk-based capital | $1.437 billion | 13.3% | 8.5% | 8.0% |
| Total risk-based capital | $1.475 billion | 13.6% | 10.5% | 10.0% |
| Tier 1 leverage | $1.437 billion | 13.8% | 4.0% | 5.0% |
| Risk-weighted assets | $10.81 billion | |||
| Quarterly adjusted average assets | $10.44 billion | |||
| SoFi Technologies | ||||
| CET1 risk-based capital | $3.224 billion | 17.8% | 7.0% | n/a |
| Tier 1 risk-based capital | $3.224 billion | 17.8% | 8.5% | n/a |
| Total risk-based capital | $1.475 billion | 18.0% | 10.5% | n/a |
| Tier 1 leverage | $1.437 billion | 17.8% | 4.0% | n/a |
| Risk-weighted assets | $18.11 billion | |||
| Quarterly adjusted average assets | $18.08 billion | |||
Note: All figures are as of March 31, 2023. Required minimums presented for risk-based capital ratios include the required capital conservation buffer. The well-capitalized minimum measure is applicable at the bank level only. Source: SoFi Technologies 2023 Q1 10-Q filing.
But it's not just about getting people in the door. Banks have a responsibility to shareholders and regulators to manage their risk and balance sheet to prevent a bank collapse when the economy is turbulent. SoFi's leadership maintains its financials beyond the minimums established by regulators, which you can see above. Investors can evaluate the stock knowing it's not skirting regulatory minimums or acting irresponsibly to grow its business.
Why the stock is surging
Sometimes, a stock needs a catalyst to change Wall Street's narrative. SoFi's roots go back to student loans, where refinancing was a core part of its business. Its student loan originations totaled $6.7 million in 2019, the year before the pandemic and the following student loan freeze. Nobody having to pay their loans gutted that business; 2022 originations were just $2.2 million, about a third of 2019 figures.
SOFI Revenue (TTM) data by YCharts
At the time of this writing, the student loan payment freeze is poised to end as part of the debt ceiling deal working through Congress. Now, the student loan payment freeze hasn't prevented SoFi from growing. Instead, the company's other businesses have picked up the slack, which you can see above. But the looming resumption of student loan payments could create a boom of refinancing from students seeking financial flexibility, and it is a potential boost to SoFi's already-thriving business.
Why SoFi's run might not be over
SoFi is a tricky stock to value because it gets lumped into the growth bucket, even though it's technically a bank -- a business model that doesn't scream growth to most investors. But valuing SoFi as a bank is OK. Looking at its price-to-book value ratio (P/B), you can see that SoFi is still reasonably priced compared to industry heavyweights like JPMorgan Chase and Bank of America.
SoFi isn't nearly as established as these trillion-dollar lenders, but it's growing far faster than both. As long as SoFi remains financially responsible, why shouldn't the stock be rewarded for its growth? Rapid member growth means it's taking business from competitors, signaling that consumers see value in SoFi's super app business model.
SOFI Price to Book Value data by YCharts
Today, analyst price targets are as high as $10 per share, roughly 42% higher than the current stock price. I would argue that not only does the above data support that price target, but I suspect analysts will raise targets once the student loan freeze ends. It's hard to see the stock not rewarding long-term investors willing to hold for the next three to five years. SoFi's recent run could be the beginning of what's to come.
