Earnings season is shaping up to be better than expected for a lot of companies. That's changing the image of how the economy is doing while inflation still is elevated and interest rates remain high. The market has fallen the past three months, but it's been inching forward recently amid indications that the American consumer is pretty resilient.
SoFi Technologies (SOFI -10.55%) released a phenomenal third-quarter earnings report earlier this week, but investors weren't sure what to make of it. Let's see what was so great, what caused some investors to sell off, and three reasons that right now is a great time to buy.
1. Product adoption is accelerating
Overall, it was a fantastic third quarter. What stands out first is that SoFi added more members and more products than during the second quarter -- 717,000 new members and more than 1 million new products sold.
Management's strategy involves what it call its financial services productivity loop, in which it upsells members new products, creating a cohesive ecosystem of financial services that leads to higher engagement and revenue.
SoFi was originally a student lender, and it's made a successful turn to related financial products. These are all available on one easy-to-use app, and it's expanded its reach from students and young professionals to anyone looking for low-fee digital products.
In the third quarter, 67% of adjusted net revenue growth came from non-loan products. Not only does this add growth drivers, it protects SoFi from the negative impact of high interest rates on its loan segment. It was fortunate to begin this pivot before the student loan repayment moratorium, and as you can see from SoFi's performance, that segment, once its bread and butter, has had a minimal effect on the overall business.
2. Net profit is coming soon
The most disappointing part of the report was the increase in the net loss from $75 million last year to $267 million this year. But SoFi, like many companies these days, likes to chart its progress with an adjusted, non-GAAP (generally accepted accounting principles) version, and adjusted net loss was $20 million. This adjustment removed a non-cash, non-amortized impairment, which means it's not likely to show up in the next quarter.
Management reiterated that it's on track to reach GAAP profitability by the fourth quarter, which would be an incredible step toward sustained viability. If SoFi can continue to reach new members and generate higher sales while becoming profitable, it could become a financial powerhouse and a real player in the banking industry.
3. The valuation is attractive, but it may not stay that way for long
So what spooked investors? Some might have been zeroing in on the huge increase in the net loss. Others may also be focusing on the deceleration in revenue growth. Revenue increased 27%, down from 37% in the prior quarter. That's certainly something to watch in the coming quarters, and since SoFi is a young company, buying shares doesn't come without risk.
SoFi stock is up about 75% this year. At the current price, it trades at 3.6 times trailing-12-month sales, which looks cheap for a high-growth stock with tons of future opportunity. If it begins to become profitable in the current quarter, the price is likely to jump.
Putting this all together, SoFi looks like a great stock to buy at an attractive entry point, and all but the most risk-averse investors could consider adding shares to their portfolios.
