What makes something the ultimate growth stock? I would say it needs to have a few features. Most importantly, you would expect it to have phenomenal prospects in a growing industry. Next, it should have capable management leading it effectively and harnessing opportunities. Lastly, it should either be profitable or getting close, and it should have a competitive edge.
Putting that all together, I'm going to nominate SoFi Technologies (SOFI 3.69%) as the ultimate growth stock. If you have $500 after paying down debt and saving for an emergency fund, consider buying shares.
Growing, growing, growing
SoFi has done an incredible job tuning into its core customers and designing products and services that resonate. Despite the many digital banks that have sprung up in recent years, SoFi has made a name for itself with its easy-to-use, low-fee tools, and solutions that just make finance easier for the masses.
SoFi started out as a student loan cooperative, and that same spirit bringing together social partners while leaving the big banks aside is driving strong customer engagement and high growth. In addition to student loans, it now offers a full suite of credit products, bank accounts, credit cards, investment tools, and more.
It has embraced a strategy of cross-selling and upselling that brings customers into its financial ecosystem and provides them with everything they need to run their finances with a simple digital app.
Revenue increased 27% year over year despite the pressure banks are facing today. But the engagement metrics illustrate the growth, and the potential, even more clearly.
SoFi added 717,000 members in the third quarter, a 47% increase over last year, and an acceleration from the last few quarters. New products are growing at a similar rate.
Image source: SoFi Technologies.
SoFi, and other banks, also might be past the worst of the economic pressure from inflation.
Fintech is exploding, and SoFi stands out
SoFi is experiencing this growth because customers, who don't always love the tedious managing of their finances, are going full-on into digital financial management. Every bank out there is moving to digital processes in some form or another, but SoFi has some advantage in being a digital-first company and not being bogged down by legacy operations. It's benefiting from its more agile systems, and its easy-to-use interface is a competitive advantage as well, since research shows that for younger customers, an easy-to-use interface is the most important feature in a digital financial app.
Management also recognizes that a key distinction SoFi has is in understanding its core clientele and offering a better experience. For example, it recent rolled out stocks at initial public offering (IPO) pricing. Most IPO stocks go to institutional investors and not retail investors, and this is a component of SoFi's overall strategy of bringing all kinds of financial opportunities to its members.
Chief Executive Officer Anthony Noto said that the acceleration in member signups and product adoption is coming from all the parts of the business working together the right way in an upward cycle, and management expects that to continue.
The profits are coming
SoFi is still in its infancy, and that often comes along with net losses for high-growth companies. In general, that's not alarming; companies can't usually grow without significant investments in product, marketing, and operations, and those won't necessarily turn into profits until the company attains some level of scale.
It does pose risk, though, which could be somewhat mitigated by rapid sales growth and coming through on its commitments.
SoFi is in that position now, reporting net losses but improving in metrics such as adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Third-quarter adjusted EBITDA increased 121% over last year to $98 million.
All three business segments were profitable, with a consolidated adjusted loss of $19.5 million, which excluded a one-time impairment charge that resulted in a net loss of $267 million. Management reiterated that it expects to report a net profit in the 2023 fourth quarter.
This hot growth stock soared last year
SoFi stock gained 125% in 2023. But don't worry if you missed out. Investors see the momentum here. If you buy now, you should be rewarded with many years of value creation.
