2023 wasn't a great year for bank stocks or fintech stocks, many of which underperformed the market. Financial stocks feel the impact of rising interest rates more acutely than other companies, and that sparks concern among investors. However, fintech and banking superstar SoFi Technologies (SOFI 3.69%) gained 116% last year after plunging 71% in 2022. Let's see why SoFi stood out from its peers in 2023, and whether or not it could double again in 2024.
SoFi offers a differentiated banking experience
Banking is an industry as old as currency, although it's taken different forms over centuries. Today's banks are substantially different than they were a few decades ago, but technology has changed pretty much every industry, with few safe from disruption. That's why agility is so often praised as a positive quality when describing great companies and great stocks; if you can't change with trends, you can't compete.
SoFi offers a banking experience with the best that technology offers. It's completely digital, with an intelligently designed, easy-to-use interface that makes banking simple. Since most people wouldn't rate taking care of their finances as one of their favorite activities, the simple act of addressing pain points in personal finance is a powerful and attractive benefit for customers.
It should be no surprise that SoFi is recruiting millions of new members annually to its platform, and further, that these members are making more and more SoFi products part of their full financial plan.
In the 2023 third quarter, membership and product adoption accelerated. Membership increased by 717,000 in the third quarter, or 47% over last year, to 6.9 million. Products increased by over 1 million, or 45% over last year, to 10.4 million.
These numbers grow every quarter, but they're accelerating now due to the general economic climate. With interest rates rising, customers look for better options for higher rates on deposits. As they discover SoFi and switch over, SoFi has the opportunity to impress them and keep them on the platform even as the interest rates stabilize.
The growth strategy is bearing fruit
Part of what has led to this growth is what SoFi calls the financial services productivity loop strategy. That involves cross-selling and upselling customers new products, which generates higher revenue per user. That kind of growth comes with lower expenses, and on top of increasing sales, results in improved profitability.
Management noted that 67% of revenue growth in the third quarter came from nonlending segments, indicating that the strategy of expanding its services beyond its original, core lending segment is working. That's been important in the high-interest-rate environment, where lending is pressured and could be a drag on business. SoFi's successful rollout of banking services, investment tools, and other financial solutions, all on its app, has shielded it from what could have a disastrous period. The diversified business strategy works in its favor for potential future challenges as well.
SoFi's banking services have added benefits. There were $2.9 billion in new deposits in the quarter, and management said that these were critical to funding $5.2 billion in loan origination on the platform, given that deposits now fund more than 65% of loans overall. The financial services segment sales were up 142% year over year in the third quarter, driving overall revenue growth of 27%.
As for overall profitability, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 121% over last year. Net loss per share excluding a one-time impairment charge was $0.03, and management reiterated that it would post a net profit in the 2023 fourth quarter.
Can it repeat in 2024?
All parts of the strategy are working together to create a growing business with improved profitability. As yet, there's no word on expected net income in 2024. So while the stock is likely to jump if SoFi does post a net profit in the fourth quarter, it may not sustain that, which will impact how the stock performs this year.
But if the Federal Reserve does cut interest rates, as expected, that will be good for SoFi's growth, and it is demonstrating that it can be profitable at scale. Investors should never count on a stock being able to double in a single year, let alone twice in consecutive years. However, if all systems go as planned, SoFi stock could do quite well in 2024.
