Traditional banking has been forever disrupted by fintech challengers that offer easy-to-use digital services, often at much lower fees. Established banks have all tried to adopt the new model and stay relevant in this new world of digital financial services, and the consumer has benefited in many ways.
SoFi Technologies (SOFI -2.06%) is one of the most popular online financial services providers, and while its performance has been largely positive, its stock price has been volatile. Depending on when you invested, you would see very different results.
Why has SoFi's stock been volatile?
SoFi has only been a publicly traded stock since its initial public offering (IPO) in December 2020. That was the height of the roaring bull market, when IPOs were landing frequently, people were investing in growth stocks, and valuations were soaring. It had a typical trajectory for that time, which means the stock jumped more than 120% in less than a month. But then it tanked in the 2022 bear market, and is still 67% off those highs.
We're in a very different market right now, and investors are pricing stocks more in line with their real value rather than hyping up growth stocks to unreasonable valuations. SoFi posts rapid sales growth rates, but it hasn't been profitable. Whereas in the past the market prized high-growth tech stocks, it's now placing a stronger emphasis on profits and viability.
Market-beating potential
SoFi continues to demonstrate robust sales growth and launch new products. In the 2023 second quarter, revenue increased 37% over last year to $498 million, and the company added 584,000 customers to its platform. That's an excellent indication of its sales-generation potential, especially because it has pivoted from a student loan organization to offer many products, and its new focus is getting existing customers to buy new and more expensive products and services. It added nearly 900,000 new products to the platform in the second quarter, a 43% year-over-year increase.
Image source: SoFi.
What's compelling right now is that management said it would reach net profitability by the end of 2023. That's coming up pretty soon.
SoFi has branched into several categories, such as investing and credit cards, and it acquired a bank last year to get a banking charter. This allows it to offer checking and savings accounts and take deposits. All of these activities have served to create a diversified business, and the all-in-one, all-digital financial services app appeals to its young customer base. Because SoFi is still known for its student loans, it draws a younger crowd. But since it offers so much more now, it's recruiting those younger consumers for more services and making more money off of them. Student loans were actually a small piece of the whole in the second quarter. The government loan moratorium is set to end in October, but it's looking for pathways to ease student loans in other ways. SoFi is well-positioned at this point to handle the changes.
You can't time the market
SoFi's stock has come down a bit over the past few weeks, but it's up more than 80% this year. At this price, it trades at a price-to-sales ratio of just over 4, which is a bargain for a high-growth stock that's about to post net profit.
If you would had invested $1,000 a year ago, you wouldn't have gained the full 80%, because the stock fell before it came back up. But you'd still be up 34%, or have $1,340.
This is only one year out of what should be many down the road for this company. Since you can't time the market, investing is more about finding great stocks to invest in than maximizing your investment to the highest possible amount. Even though the stock is already up a lot this year, there's plenty more room for growth ahead, and the stock trades at an attractive entry point.
