SoFi Technologies (SOFI 1.56%) has followed a classic growth stock path since its initial public offering in June 2021 that includes soaring growth rates on top-line revenue and customer acquisitions as well as bottom-line losses related to its growth efforts. This kind of stock gets plenty of investor attention when there is a strong bull market underway (as there was at the time of the IPO) but it tends to get shunned in a volatile economic climate where investors become more wary and focus instead on safer stocks.
This pattern was evident as SoFi stock took a big hit in 2022. But with market sentiment improving in 2023, investors took some tentative steps back to showing an interest again in growth stocks. Many growth stocks were fairly sold off last year because their growth rates (and their loss rates) didn't justify their highly elevated valuations -- SoFi included. But investors are learning this year that SoFi's valuation was taken down a few too many notches and are reacting quickly to resolve that. As a result, SoFi stock is now up 104% so far in 2023.
Can Sofi's business support this massive gain? Is its valuation still misleading? Let's see where SoFi's business is going and where it could be a year from now to see if an answer reveals itself.
Expanding its social mission
SoFi began operations just over 10 years ago as a way to offer student loans at more competitive interest rates than was currently available. Its all-digital, easy-to-use platform became popular quickly, the private company grew, and SoFi eventually went public through a special purpose acquisition company (SPAC) offering in 2021.
As the company grew, it expanded into a full financial services app with personal lending, investing, and even travel services. It's still focused on offering competitive rates and simplifying financial services.
NASDAQ: SOFI
Key Data Points
The business plan resonates with customers, and the customer count continues to climb. There were 443,000 add-ons in the first quarter for a total of nearly 5.7 million. Revenue growth is also robust: First quarter revenue increased 43% year over year to $472 million. Management is guiding for revenue to grow 32% to 35% year over year in the second quarter.
One significant headwind for SoFi right now is the student loan payment moratorium since this segment of its business has been its main revenue driver. Branching out into new products helped soften the hit, and business is brisk in its other segments.
But the pause in loan paybacks has hurt. Student loan originations were $525 million in the first quarter, or 50% lower than pre-pandemic numbers. But personal-loan originations were $3 billion, a 20% increase over last year.
Home loans are also taking a hit as the high-interest-rate environment has slowed home-buying interest. Loan originations in Q1 for this segment were down 71% from last year, but the program wasn't all that big to begin with (there was $90 million in originations in Q1). Management also stressed that it has rigorous risk-assessment models in place and that these are high-quality loans.
A booming business leads to improved profitability
The main problem with SoFi's business has been increasing bottom-line losses, but that's starting to turn around. In Q1, the net loss improved from $110 million last year to $34 million this year, and last year was an improvement over the previous year.
SOFI Net Income (Quarterly) data by YCharts.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased in Q1 from $9 million last year to $76 million this year. CFO Christopher Lapointe said management expects SoFi to be net income positive by 2023's fourth quarter, which means it could be turning a net profit pretty soon.
Should you buy SoFi stock today?
At the same time that revenue continues to rise and profitability is improving, SoFi stock's valuation has come down. Shares are trading at 4x trailing-12-month sales, which is reasonable for a high-growth stock.
SoFi looks like it has a bright future as it draws new customers and increases the adoption of its products. Its strategy of expanding its services helped it weather challenges to its core business, and that's an attractive quality in a stock.
A year from now, the company is likely to continue on a similar trajectory with more accounts, and its financials could get a big boost as student loan repayments return. Once interest rates go down, SoFi will also benefit from more loans. If it does post net profits by the end of this year, the stock will likely climb.
According to some calculations, the S&P 500 might be back in bull market territory, and positive investor sentiment is likely to continue lifting SoFi stock, even in the near term. The long-term outlook looks strong, and SoFi could end up being a bargain at the current price.
