It's getting harder to find deals in today's rising market. The S&P 500 is gaining ground, up nearly 19% and getting closer to ending this bear market. While that would make investors very happy, there are reasons to be cautious about the stock market rallying right now. After all, as Warren Buffett is known for saying, investors should be fearful when others are greedy.
In the previous bull market, high share prices came with astronomical valuations. It seemed easy to make money in the stock market, until it tanked. Now investors are doing the hard work of determining which stocks are worth investing in instead of relying on easy money.
SoFi Technologies (SOFI 3.81%) has been reporting winning performance, but the stock is still trading at a reasonable valuation. It's down 73% from its highs after going public, but positive momentum is building with the stck up nearly 50% this year. Most likely, it won't stay down for long. Here's why.
NASDAQ: SOFI
Key Data Points
A better way to bank
SoFi offers banking services on its all-in-one digital app with low fees and high interest rates. It has become popular with the younger demographic it was created to serve, and although banks can feel the impact of high interest rates in increased defaults, SoFi is feeling the other side of that as customers sign up to benefit from better rates on deposits.
Deposits increased 23% ($2.9 billion) to $15.7 billion in the third quarter. Management noted that 90% of these deposits came from direct-deposit accounts, indicating that these should continue to rise organically.
In the third quarter, not only did this trend continue, but it also accelerated. There were 717,000 new members, and revenue increased 27% above last year.
Image source: SoFi.
A financial services powerhouse
SoFi's strategy revolves around what it calls the financial services productivity loop, which means it draws in new members for one product and upsells and cross-sells new products. That leads to scaling up quickly and improving profits.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 121% year over year, to $98 million, in the third quarter, and net loss excluding a goodwill impairment improved from $74.2 million to $19.5 million. Management confirmed that it expects to post profits under generally accepted accounting principles (GAAP) in the current fourth quarter.
Not only is this good for profitability, but the diversification of its business also means it has eggs in different baskets and can manage through challenges in one area. SoFi's roots are in student loans, which are now a small portion of the total business.
And while other parts of the lending business remain pressured, specifically mortgages, the other segments are picking up the slack. In fact, 67% of revenue came from the non-lending segments of financial services and the technology platform.
Image source: SoFi.
All at a reasonable price
Part of the reason SoFi stock is down so much from its highs is that, at the time, the valuation was unwarranted. It was a brand-new stock just on the market, an unknown with no profits but great potential.
It's also down 20% over the past three months, though, despite incredible third-quarter results. This is partly due to growth slowing down, and partly to general risk associated with bank stocks amid high interest rates.
At the current price, shares trades at 3 times trailing-12-month sales, which isn't cheap for a bank stock. But SoFi could be viewed more as a fintech stock. It's certainly a high-growth stock, which means it gets a premium. It looks like a bargain when compared with its growth opportunities, and this is a great time to buy shares before they soar again.
