SoFi Technologies (SOFI 3.69%) was a big winner last year, crushing the Nasdaq Composite Index and rising 116% in 2023. Despite this monster performance, shares remain 68% below their peak price, leading some investors to view the current situation as a lucrative opportunity to allocate capital.
Is it time to buy the fintech stock?
Latest developments
Since its founding in 2011, SoFi has achieved success disrupting the traditional banking industry by focusing on a digital-only approach and by targeting a younger and more affluent customer. The company has quickly grown its revenue and membership base over the years. And it has long prioritized providing a superior customer experience, which should propel the company in the years ahead.
Even during a period of economic headwinds, particularly higher interest rates, SoFi continues expanding at a brisk pace. Sales jumped 27% in the most recent quarter (the third quarter, ended Sept. 30). While this is a far cry from the monster growth posted in previous years, it's still impressive. And the customer count now totals 7 million.
The end of the moratorium on student loan payments late last year should provide a boost for SoFi, as demand for student loan refinancings should pick up. This is the single product that the company was originally founded on, so it has some competency here.
However, investors can't ignore that in the past couple of years, the vast majority of loans that the business originated have been personal loans. As I noted above, SoFi typically targets a more affluent customer base, which should help to minimize default risk. But if the U.S. economy does enter a severe recession in 2024, shareholders must worry that credit losses could shoot up.
To SoFi's credit, though, it has done a wonderful job at attracting deposits. At the end of 2022, the company had $7.3 billion worth of deposits on its balance sheet.
The regional banking fiasco of early 2023 forced consumers to figure out where the safest places to park their capital were. And looking back on the last 12 months, SoFi was a huge winner. Its deposit base totals $15.7 billion now, providing a low-cost source of funding to originate more loans.
A path to profitability
Like many of its fintech peers, SoFi has long been consistently unprofitable. In an era of low interest rates and loose monetary policy, these companies could continue aggressively investing in growth initiatives without regard to the bottom line. SoFi was no different, but now things could be changing.
According to CEO Anthony Noto, SoFi is expected to generate net income based on generally accepted accounting principles in the fourth quarter of 2023. We won't find out for sure until it reports earnings on Jan. 29.
Nonetheless, this would be a huge milestone. What's even more impressive is that SoFi is about to hit positive earnings during what has been an otherwise unfavorable macroeconomic backdrop. Investors need to pay attention to trends in the hope that SoFi can become sustainably profitable.
Don't forget the valuation
Before making a decision to buy the stock, investors must also consider the valuation. It's one thing to find a quality business; it's another thing to pay the right price. In other words, a great company can make for a terrible investment if investors overpay. All else equal, a lower valuation is better because it increases upside.
As of this writing, SoFi stock sits significantly below its all-time high, a record that was set roughly three years ago. Even though optimism and momentum for the stock are picking up, the price-to-sales ratio of 3.9 represents a discount to its historical average.
Investors who believe in the company's long-term growth story, as well as management's ability to consistently generate net income, should take a closer look at the stock. Over the next five to 10 years, SoFi could be a big winner.
