A couple of years ago an entrepreneur by the name of Chamath Palihapitiya emerged into the limelight. Palihapitiya was long known within the tight-knit venture capital community of Silicon Valley, yet few mainstream investors knew much about him. That dynamic seemed to change virtually overnight, and a lot of it had to do with his support for special purpose acquisition companies (SPACs).
One of the companies that Palihapitiya helped take public via SPAC is banking platform SoFi Technologies (SOFI 3.69%). You may be familiar with SoFi due to the company's aggressive marketing tactics, which include catchy commercials and its namesake National Football League stadium.
What you may not be familiar with is the depth of SoFi's operation. Let's dig into the business model and compare the company against some industry peers. After doing so, I hope my bullish stance becomes more clear.
Building the roadmap to success
SoFi Chief Executive Officer Anthony Noto is a former investment banker at Goldman Sachs and previously served in the C-suite of both Twitter and the NFL. The reason that I am highlighting his impressive resume is because I believe he has leveraged some important skills from both the banking side and corporate finance side of operations to build his vision for SoFi.
Over the last several years SoFi has acquired a number of different companies. For example, it bought banking-as-a-service platform Galileo to help augment its digital services. The company followed up this transaction by acquiring another tech-heavy platform, Technisys. And earlier this year during the turbulent panic around SVB Financial's Silicon Valley Bank, Signature Bank, and Credit Suisse, SoFi acquired Wyndham Capital Mortgage.
With all of these acquisitions, investors may be concerned about integration efforts, transaction costs, and product roadmap. But as I pointed out above, SoFi has a well-versed dealmaker and technology specialist running the operation. These deals have helped SoFi build well beyond its traditional base in student loans. The company also offers traditional financial services such as checking and savings accounts as well as credit cards. Moreover, personal loans and home loans also fall under the legacy lending business umbrella.
Image source: Getty Images.
The business model is working
SoFi is evolving into a one-stop shop for banking all in the palm of your hand. The backbone of its business model is cross-selling the company's various products to new and existing customers. For the quarter ended June 30, SoFi boasted 6.2 million total members on its platform, which represented 44% growth year over year. Moreover, the user base is using a total of 9.4 million products, which implies that each member is using more than one product on average.
To put some context around these user statistics, SoFi's total second-quarter revenue of $498 million was up 37% year over year. While home loan origination volume remains a challenge due to rising interest rates, the total lending business still managed to grow 29% year over year, reaching $331 million in revenue. The financial services business was the big winner in Q2 as it generated $98 million in revenue, which was more than triple Q2 2022.
A deep dive in valuation
When assessing the value of a company, looking at certain metrics such as price-to-sales (P/S) ratio, price-to-earnings (P/E) ratio, and market capitalization can be important. For SoFi, I'd like to go a bit deeper in this analysis.
The fintech ecosystem includes many public and private companies. Interestingly, several venture-capital backed companies have already reached unicorn status, meaning that are valued at more than $1 billion.
SoFi's current market cap is $7.7 billion and its enterprise value is $11.4 billion. Justifying the valuation of a private company can be a daunting task because the financial information is so limited. Generally speaking, any revenue or profit figures published about private companies should be taken with a grain of salt and are only educated guesses. But roughly speaking, the main takeaway is that SoFi is valued lower than many of its private competitors such as Stripe, Chime and Plaid.
Taking this a step further, the chart below shows the P/S ratio of a number of traditional banks as well at Latin American fintech Nu Holdings.
Data source: YCharts
Investors can see that the only stock trading at a premium to SoFi is Nu, another digital-focused neobank. The takeaway from the chart above may seem obvious in that digital-first and tech-enabled banking solutions command a higher multiple than traditional financial institutions.
But all things considered, SoFi's P/S multiple is not materially above the traditional banks, and it is trading far below Nu.
On one side of the equation, SoFi seems to merely have put a modern spin on traditional banking. But on the other side, given the app's popularity, investors could argue that its sticky user base mimics that of a high-growth software-as-a-service (SaaS) company. For this reason, it can be quite a challenge to properly value the company and determine which multiple is appropriate.
While SoFi is largely known for its student loan business, the financial results above reflect that there is much more to it than that. Given the analysis above, I believe that SoFi is misunderstood among the investment community and the stock is an undervalued gem.
