After a challenging last year, SoFi Technologies (SOFI 3.69%) has gone on an absolute tear in 2023. Elevated interest rates and the end of the student loan moratorium have boosted the stock, up 112% since the start of the year.
The fintech is appealing to a certain set of investors for several reasons. It's growing quickly, benefiting from its banking charter (which it acquired early last year), and it is soaking up customer deposits at a time when many other banks have a hard time holding on to them.
Despite the positive momentum, the stock still trades 65% below its all-time high. If you're considering buying SoFi today, here are three things to know first.
1. SoFi's diverse business is rapidly adding customers
Before the pandemic, SoFi's bread and butter was student loans. However, when the federal government put a moratorium on student loan payments, SoFi was forced to rethink its business.
In early 2022, SoFi acquired Golden Pacific Bancorp for $22 million, which enabled the company to go from a lender to a full-blown financial services company. Today, SoFi offers customers checking and savings accounts, an investment platform, credit cards, and a personal finance management platform to help members reach their financial goals.
What is most impressive about SoFi is its staggering growth. At the end of the third quarter, SoFi has over 6.9 million customers (which it calls members), representing a growth of 47% from the prior year. What's most impressive is how consistently SoFi adds customers. Over the past 14 quarters, SoFi has grown its quarter-over-quarter member count by 10% or more every quarter except for one.
Chart by author.
2. SoFi's banking charter helps it attract deposits and benefit from higher interest rates
One reason SoFi is steadily adding to its customer base is because of the appealing interest rate it offers on deposits. The fintech offers one of the highest-yielding savings accounts out there, currently a 4.6% annual yield.
This yield is well above the national average of 0.46% on savings accounts, according to the Federal Deposit Insurance Corp. As a result, SoFi has attracted lots of dollars from customers who may be switching from another bank that doesn't offer anywhere near the same rate.
SoFi boasts $15.7 billion in deposits at the end of the third quarter. SoFi's deposit base has grown 113% from the end of last year and a whopping 1,256% from when it first acquired its banking charter in the first quarter of 2022. What is most impressive about this growth is that several other banks have struggled to hold deposits because they can't (or won't) offer yields close to what SoFi does.
In addition to offering checking and savings accounts, SoFi's banking charter allows it to hold more loans on its books, which enables it to profit from rising interest rates. Through the third quarter of this year, SoFi's net interest income across all of its products was $872 million, up 132% from the same period last year.
3. How you perceive SoFi's value depends on whether you view it as a bank or a fintech
When investing in SoFi, many investors question whether it should be valued as a rapidly growing fintech or if it warrants a valuation that is more similar to banks. You could make the case for either one.
For example, SoFi owns a bank charter, and much of its income comes from banking-type activities. Like many banks, it offers checking and savings accounts, loans, and credit cards. In addition, it has earned a significant portion (nearly 58%) of its net revenue through net interest income this year.
In that case, SoFi is quite expensive compared to other banks. Today, SoFi is priced at 4.72 times sales, well above major banks like JPMorgan Chase, Wells Fargo, and Bank of America.
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On the other hand, SoFi is growing at a pace most banks couldn't possibly imagine. If you believe it's in its early stages of growth, based on the rapid growth of its customers and deposit base, then it certainly garners a higher valuation than traditional banks.
However, that growth won't last forever, and it would be interesting to see how the bank does if the Federal Reserve lowers interest rates next year. After all, its high-yielding accounts and net interest income have been significant drivers of its growth in the last year.
Is SoFi stock right for you?
SoFi presents a unique investment opportunity with both traditional banking and promising fintech elements. As a bank, it's relatively expensive. As a fintech and a rapidly growing technology company, you could argue that its valuation is quite reasonable.
The company is growing quickly, adding members and deposits at an impressive pace. Despite its growth, the company has yet to turn a profit, although it expects to post one in the fourth quarter this year. A profitable quarter would be a big achievement for the company, which hasn't been profitable since going public in late 2020.
SoFi's rapid growth of its platform is promising, but its lack of consistent profitability still makes it a riskier investment. For investors willing to tolerate the risk, SoFi could make a compelling investment to buy a little today and add to over time as long as it continues to build on its positive momentum.
