Online banking company SoFi Technologies (SOFI 2.06%) is a challenging stock to analyze. A little over two years ago, it made its public market debut via a merger with a special purpose acquisition company (SPAC). Since then, its stock has experienced a fair amount of turbulence, peaking in June 2021 north of $23 per share. Today, it's trading nearly two-thirds below that high.
There are several reasons why SoFi stock has experienced such dramatic ebbs and flows. For one, the company has a history of burning a lot of cash. Furthermore, it has been pretty acquisitive over the last couple of years, leaving skeptics with a lot of room to doubt its ability to integrate these new products and services.
If that weren't enough, SoFi's roots are in lending, particularly for student loans. This part of SoFi's business model has turned some investors bearish, as the company was not immune to the macro effects of the extended (but soon-to-be-ending) moratorium on student loan repayments. Lastly, on top of all this, the financial services sector is dominated by large banks like Goldman Sachs, JP Morgan, and Morgan Stanley.
However, these reasons for skepticism have caused some to overlook the promising segments of SoFi's business. The company is quietly building something special, and the stock warrants a second look for your portfolio.
Loans are just one part of the equation
SoFi reports its revenue in three main buckets: lending, technology, and financial services. Each of these categories includes a number of products and services. The lending business covers student loans, personal loans, and home loans. The technology segment is built primarily on a platform called Galileo, which SoFi acquired three years ago. SoFi's financial services business mimics traditional banking products such as checking and savings accounts, credit cards, and more.
In the first quarter, SoFi's lending segment reported revenue of $337 million. And while the company's total revenue of $472 million represented healthy growth of 43% year over year, it's a good idea to analyze the results in lending a bit further.
In Q1, home loan origination volume plummeted by 71%, and student loan origination volume sank by 47%. This really showcases how exposed SoFi's lending segment can be during a rising interest rate environment, coupled with multiple extensions of the student loan repayment moratorium. However, personal loans make up the overwhelming majority of SoFi's origination volume, and fortunately for the company, originations in personal loans increased 46% year over year during Q1, thereby increasing total loan originations by 7%.
Given the above, it's understandable how some investors would overlook SoFi's other businesses. The lending business is a huge part of the company, and the Q1 results illustrated why the road ahead for that segment won't be smooth. With all of that said, SoFi has done a tremendous job building out its technology platform as well as penetrating the traditional financial services market. And I believe that those two segments are the ones that will ultimately propel the company into hypergrowth mode.
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The whole is greater than the sum of its parts
SoFi's leadership team has described their vision as attempting to build the Amazon Web Services of fintech. In essence, SoFi wants to become a one-stop shop for all of your banking needs, so it's building a flywheel business model that it hopes will generate exponential growth over time by cross-selling products to new and existing customers.
As of the end of the first quarter, SoFi's platform boasted 5.7 million members, up 46% year over year. Moreover, the total number of products those members used rose by roughly 660,000 during the quarter to 8.6 million. So on average, each SoFi member is using 1.5 of its products. This is important, because it is tangible evidence the company can successfully cross-sell its products within its user base, which should yield strong revenue growth and margin expansion down the road.
When it comes to translating these key performance indicators into actual dollars, SoFi's top-line growth doesn't lie. In Q1, revenue from its technology segment grew 28% year over year to $77.9 million. Financial services revenue more than tripled from $23.5 million to $81.1 million.
Although that revenue growth in technology and financial services was nice to see, perhaps the biggest victory for SoFi came on the bottom line. For the quarter, it reported a net loss of $34.4 million. To put this into context, its loss in Q1 2022 was $110.4 million. So while the company is still burning cash, its ability to reduce its losses by this magnitude should really encourage investors. During the earnings call, management made it clear that it expects the company to be GAAP net income positive by Q4.
Valuation is too good to pass up
As of this writing, SoFi stock is up almost 90% year to date. Investors could argue the stock was oversold for a long period of time following its public debut. Moreover, it likely has benefited from some broader trends in the Nasdaq Composite index, which is up by more than 30% this year.
Given its lack of profitability, the price-to-earnings ratio is not a useful metric for valuing SoFi or comparing it to its peers. However, on a price-to-sales basis, it trades at a ratio of 4.7. To put this into context, another tech-heavy banking platform, Nu Holdings, trades at a ratio of 10.5. Moreover, the tech-oriented financial services firm Upstart Holdings also trades for 5.4 times sales, yet its revenue decreased 67% year over year in Q1. Considering SoFi grew its top line by more than 40%, it seems unreasonable the two should be trading at comparable multiples. This could imply SoFi is undervalued.
SoFi clearly has a lot of secular tailwinds, particularly in its tech platform and financial services offerings. The company is growing like a weed in those areas while knocking on the door of profitability. Long-term investors should take the opportunity to dollar-cost average their way into a position in this stock and exercise patience as the company continues executing on its vision.
When it comes to modern banking, it's SoFi's world, and its competitors are paying rent.
