Remember the situation in the stock market in early 2021? Companies lacking sound fundamentals, like AMC Entertainment and GameStop, saw their shares skyrocket in no time.
While such "meme stocks" generally make for terrible investments, there is one current meme stock that has legitimate long-term upside: SoFi Technologies (SOFI 3.69%). It's not hard to find reasons to like this fintech company.
A better user experience
The banking industry is notorious for not being the most user-friendly. Outdated technological systems and the tendency to react slowly to changes have created a wide-open opportunity for a digital-only bank like SoFi to find outsize success. In fact, some customers have said that SoFi has provided the best banking experience they've seen.
SoFi has harnessed technology to create a unique model. It doesn't have any bank branches, and this setup has attracted a younger demographic that appreciates a smartphone app to handle their finances.
A glaring sign that SoFi is doing a wonderful job at standing out is the growth of its deposits. As of the end of 2022, the business had $7.3 billion of deposits on its balance sheet. This figure has soared to $15.7 billion as of Sept. 30.
It helps that the company offers a 4.6% yield on savings accounts. This probably wouldn't be possible if the business had to deal with all the added overhead expenses of a nationwide branch network.
Strong growth
A better user experience has directly contributed to SoFi's growth trajectory. Revenue in the last three years jumped 167%. And during this time the customer base expanded from 1.5 million to just under 7 million.
To be absolutely clear, investors can't expect the monster growth that SoFi has registered up to this point to continue indefinitely. This argument is bolstered by the fact that the banking industry is one of the most competitive, with financial service products being viewed as a commodity these days. Consequently, the opportunities to differentiate one service provider from another are slim.
But to SoFi's credit, the revenue and customer gains that it has been reporting during a period of rapidly rising interest rates and in an inflationary environment are encouraging. Plus, by catering to a younger and more affluent demographic, SoFi has opportunities to cross-sell products, while at the same time establishing a banking relationship with consumers that can last many decades.
This is something that will build investor confidence in the company's prospects over the long term.
Profits on the horizon
Perhaps the reason that SoFi shares are currently 69% below their peak price from February 2021 is the fact that the business is unprofitable. In 2021 and 2022, SoFi posted a combined net loss of $804 million. And through the first nine months of 2023, the company's net loss totalled $349 million. Unprofitability is common with early stage fintech enterprises.
Management has fully focused on investing heavily to achieve greater market share and SoFi is registering rapid growth. Capital goes toward things like product development and sales and marketing efforts.
This isn't a shocking revelation, and if the leadership team views this as the best use of cash to grow the intrinsic value of the business and better position it for lasting success, then I trust it's the right strategy.
But a major financial milestone could be on the horizon. Executives believe SoFi will produce positive net income using generally accepted accounting principles (GAAP) in the current quarter. This could be the beginning of consistent profits, and investors should keep an eye on whether this turns out to be the case.
Of all the meme stocks out there, SoFi stands out as having legitimate upside. Investors should take a closer look at the business.
