Shares of SoFi Technologies (SOFI 3.69%) recently rocketed up in response to a glowing fourth-quarter earnings report. The member-based consumer bank blew past expectations that were already high.
All the extra attention SoFi's getting lately has everyday investors who are still unfamiliar with the bank wondering if it's a smart stock to buy now. To find out if SoFi is a smart buy, let's start by looking at its recent performance in light of some opportunities and challenges that lie ahead.
Beating expectations
For years, SoFi has been able to point to positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). A lot more investors started paying attention to the rapidly growing consumer bank in early 2023 after it began guiding toward profitability according to generally accepted accounting principles (GAAP).
Wall Street expected $0.00 per share in GAAP earnings during Q4. SoFi pleasantly surprised analysts with GAAP net income that reached $48 million, or $0.02 per share.
Looking out to the rest of 2024, SoFi expects U.S. gross domestic product (GDP) to contract, unemployment to rise above 5%, and four interest rate cuts to bring the federal funds rate down to 4.5% by the end of the year.
With a less-than-terrific outlook for the economy in 2024, SoFi isn't expecting much bottom-line growth in the near term. Management expects to earn between $0.07 and $0.08 per share this year on a GAAP basis.
With a rapidly growing customer base, though, earnings growth is expected to accelerate after 2024. In 2026, the company expects GAAP earnings to reach between $0.55 and $0.80 per share. Beyond 2026, management expects earnings to continue growing by about 20% to 25% per year.
No longer relying on net interest margin
SoFi's confident about sustained bottom-line growth because it's no longer relying on net interest margin or the difference between interest paid to depositors and interest received from borrowers. The company's financial services segment, which doesn't include its lending business, contributed a modest profit in the third quarter last year that accelerated to $25 million in Q4.
SoFi finished 2023 with over 7.5 million members, a 44% gain year over year. Some of those members are strictly borrowers, but a rapidly growing number also have financial service accounts, like a checking account or a credit card, with the bank. This year, SoFi expects all those new members to push financial services revenue 75% higher, and it isn't the company's only rapidly growing operation.
Rather than paying a vendor to use its payments platform, SoFi acquired digital payments platform Galileo in 2020 and expanded it in 2022 with the acquisition of Technisys' cloud-native banking platform. Now, its tech platform is capable of serving traditional banks that want to offer more services online, as well as the tech and consumer companies it served in the past.
An increasingly diverse set of clients drove Q4 tech platform revenue 13% higher year over year to $97 million. Financial services and technology contributed a combined 38% of total revenue in 2023. In 2024, the company expects these rapidly growing segments to contribute roughly half of total revenue.
Image source: Getty Images.
A buy now?
SoFi increased its tangible book value by $334 million last year, to $3.5 billion at the moment. With rapidly growing revenue from lending, financial services, and its tech platform, SoFi is confident that its tangible book value will expand by $300 million to $500 million this year.
At the moment, SoFi shares are trading for roughly 2.1 times the midpoint of the bank's predicted tangible book value at the end of 2024. For comparison, shares of JPMorgan, America's largest bank by book value, currently trade for 2.15 times its current tangible book value.
JPMorgan is a fine bank, but it isn't growing its membership roster by double-digit annual percentages. SoFi looks like a bargain in comparison, but the stock isn't appropriate for every investor's risk tolerance level. If you're nearing retirement or retired already, you're probably better off investing in one of the more established banks that SoFi competes with.
SoFi is intent on becoming a top 10 financial institution. At its current pace of membership growth, this could happen in about a decade and make today's shareholders much wealthier in the process. Despite its recent run-up, this is still a good stock for relatively young investors with a higher tolerance for risk to buy.
