To be clear, SoFi Technologies (SOFI -1.70%) hasn't really panned out as a worthwhile investment since it hit the public markets. As of this writing, the stock is 63% below its all-time high of $25.78, which it hit in February 2021.
However, 2023 has brought back a lot of optimism for this fintech business. Shares are up 105% in 2023, crushing the 35% gain of the Nasdaq Composite Index by a huge margin.
Before hopping on the bandwagon in the hopes of achieving market-beating returns, it's a good idea to understand more about the company. Here are three things the smartest investors know about SoFi.
The company boasts outstanding growth -- with potentially more to come
At its core, SoFi is an online banking institution. Because it's entirely digital, it doesn't operate any brick-and-mortar branches. And this has allowed management to focus relentlessly on providing a better user experience, something that has usually been missing in the financial services industry.
SoFi has clearly caught on with customers. Between 2019 and 2022, revenue and members each soared at respective compound annual growth rates of 59% and 73%. While macro headwinds have resulted in slower gains, SoFi was still able to increase revenue in the first three months of 2023 on a year-over-year basis. What's more, since SoFi's target demographic is made up of younger, high-earning customers, the company can potentially become a lifelong banking partner for this cohort, which would be an even more lucrative relationship.
Higher interest rates discourage borrowers from taking out loans, but it has benefited SoFi in another way. Net interest income in Q1 totaled $201 million, substantially higher than a year ago. Perhaps even more impressive, SoFi's deposit base grew by 37% from the end of 2022 to March 31, as consumers flock to its attractive savings yield. This helps the business because deposits are usually the lowest-cost source of funding for a bank.
It's not just about student loans
SoFi started out in the world of refinancing student loans. Even today, this is a big part of the business. As of March 31, 32% of SoFi's loan book is made up of student loans. The government's moratorium on payments throughout the pandemic has come to an end, with payments set to resume later this year. This may be a boost for SoFi, which could see refinance activity pick up as borrowers try to obtain more favorable terms.
Personal loans are becoming more important to the business. During Q1, 83% of the loans originated by SoFi were personal loans. The nominal figure of nearly $3 billion was up roughly 50% year over year. While SoFi does aim to target a more affluent clientele, the fact that personal loans are unsecured, meaning that they don't have collateral attached to them, adds risk to SoFi's operations, especially if a severe recession is on the horizon.
The company also originated $90 million worth of home loans in the latest quarter. To help grow this product line, SoFi recently acquired a mortgage lender, Wyndham Capital Mortgage.
SoFi's valuation
Smart investors consider a stock's valuation before making any sort of decision. SoFi doesn't earn any profits, so we can't use the popular price-to-earnings ratio. And since this is a banking provider, an important metric to look at is the price-to-book (P/B) ratio. The P/B multiple measures a company's stock price relative to its book value per share. For banks, as opposed to other types of companies, book value can be an accurate measure because the balance sheet lists assets and liabilities at fair value.
As of this writing, SoFi's P/B ratio is 1.7, which is much higher than it's been over the past 12 months. However, this valuation is slightly cheaper than SoFi's historical average P/B multiple of 1.8. This valuation suggests that investors are certainly intrigued by the stock thanks to the underlying business's outsized growth potential.
