Banking, the simple business of lending someone money and being paid back with interest, is one of humankind's oldest industries. It provides a foundation for the modern economy. As a result, the world's largest banks have grown to be worth hundreds of billions of dollars.
Because the industry is so large, with thousands of banking companies (and hundreds of bank stocks) to potentially follow, it's easy to lose track of the progress an up-and-comer like SoFi Technologies (SOFI 3.69%) has made since going public a few years ago. The stock has had its ups and downs, slowly trudged higher over the past 18 months. Still, its stock price remains down over 50% from its former high.
While the stock is still recovering, SoFi's business is far better off these days. Here's why investors should consider pouncing on SoFi stock before Wall Street comes to its senses.
SoFi is scooping up high-quality customers
For those unfamiliar with SoFi, it's an all-digital bank that offers a variety of loans and services through its smartphone app. Unlike most banks, SoFi doesn't have physical branches -- it conducts its business online. SoFi got its start in the student-loan refinancing business and has rapidly expanded. That start arguably played an important role in establishing its brand with young, educated consumers.
The economy is approaching a fascinating fork in the road. Older generations are leaving the workforce, resulting in millennials and Gen Zers becoming the next critical cogs of the U.S. economy. And it's an economy that relies more and more on consumer spending.
Young, educated, high-earning consumers are today's financial sector's most-desired customers. According to The Harris Poll, SoFi has improved its brand equity throughout 2023 with all consumers aged 18-plus and with young, high-earners (those making $100,000 or more).
SoFi's numbers show just how popular the bank is becoming. Its member count soared from 1 million in early 2020 to nearly 7 million as of Q3 2023. The Q3 count was a 47% year-over-year increase, so this momentum is still robust. The U.S. population isn't growing nearly this fast, so it's clear that SoFi's primarily winning business from other banks and credit unions.
The banking business is ramping up
As a bank, SoFi's most important business is profitably lending money. Essentially, banks lend out the deposits they get with the goal of generating interest on those loans. They also pay interest to entice customers to deposit money with them. The difference between interest earned on loans and what's paid to depositors is called net interest income and forms a valuable revenue source.
SoFi also generates money from fees and services -- total revenue and net interest income are shown below. Ultimately, net interest income could become a larger piece of the overall business over time. SoFi's overall business has multiplied in size over the past few years. Surprisingly, this growth came during a pandemic-related government-mandated freeze on student loan payments, severely limiting SoFi's student loan business.
SOFI Net Interest Income (TTM) data by YCharts.
The freeze on payments ended a few months ago, so investors could see even more growth as that business segment picks up again. SoFi originated just $2.2 billion in student loans in 2022, down from $6.6 billion in 2019. Given how much the bank's customer base has grown, that volume should come back -- and then some.
While SoFi technically isn't profitable yet, it is lowering its losses with each passing quarter. Net income took a hit in 2023 due to a non-cash goodwill charge. Management believes it will turn a GAAP profit next quarter and in future years. Hitting GAAP profitability while growing members so quickly could cause an abrupt improvement in Wall Street's sentiment toward the stock.
The stock is priced right for long-term returns
At first glance, SoFi's stock is priced fairly. If you compare it to some major banks like JPMorgan Chase and Bank of America, its price-to-book value ratio is right there in the pack.
SOFI Price to Book Value data by YCharts.
But remember that SoFi is growing so much faster than most banks. Over the past few years, its net interest income growth rate has left the other banks in the dust. Again, this should continue due to student loans returning and more customer growth over the coming quarters and years.
SOFI Net Interest Income (TTM) data by YCharts.
SoFi doesn't have the golden name or arguably a too-big-to-fail status like these other banks. Still, for long-term investors looking for a high-growth company that could be a leading bank for the next generation of American consumers, SoFi is an appealing choice. How long it stays under the radar is the million-dollar question.
