The banking industry is ready for disruption. Legacy stalwarts play a major role in how money moves around the world, but advancements in technology have been making waves in the banking space for some time. So-called "neobanks" -- including SoFi (SOFI 3.69%) -- have risen in popularity thanks to a unique approach of marrying financial services with a mobile-first platform.
SoFi offers many of the same products as larger banks do. However, you may not be familiar with the company as it doesn't have brick-and-mortar locations. Instead, it uses a digital-first platform that allows users to obtain loans and mortgages, invest in the stock market, or deposit a paycheck right from their phones.
Recently, the company reported a quarterly profit for the first time since going public in mid-2021. Does that mean the stock is a buy?
Let's dig into SoFi's business and understand how it was able to finally move out of the red. A thorough understanding of the company's business model may inspire a bullish outlook on the stock.
What makes SoFi's business model unique?
It's not uncommon for people to use a host of different companies for their financial services. For example, you may bank with Wells Fargo but use Charles Schwab for your brokerage account. SoFi is trying to disrupt this approach by building a one-stop shop for all your financial needs.
By doing so, SoFi is looking to build a "flywheel" business model where incremental gains across the business could theoretically lead to substantial momentum in the long term.
The business is looking to consistently monetize its users by selling them additional products. This cross-selling dynamic of making more money from existing customers can help businesses allocate more money toward product innovation, rather than customer retention.
As of Dec. 31, SoFi boasted 7.5 million members on its platform, up 44% year over year, and those people are signed up for a total of 11.1 million products. This implies that each SoFi member is using 1.5 products on the platform, on average.
While it's clear that SoFi is succeeding in customer acquisition and cross-selling, investors may be wondering why the company struggled to generate a profit for so long. Over the last few years, SoFi has completed a number of acquisitions, including Wyndham Capital Mortgage and fintech platforms Technisys and Galileo. Integration costs associated with these acquisitions, coupled with aggressive marketing campaigns and significant research and development expenses, outpaced the company's revenue growth for some time.
This makes sense. SoFi is essentially trying to reinvent modern banking, which is no small or cheap endeavor.
Image source: Getty Images.
What does the long-term picture look like?
For the quarter ended Dec. 31, SoFi reported positive net income on a generally accepted accounting principles (GAAP) basis. Yet despite this $48 million profit, SoFi was still unprofitable on an annual basis.
However, the company's reported loss of $341 million for the full year is misleading, given the goodwill impairment SoFi incurred earlier in the year. After adjusting for non-recurring items, the company's burn was closer to $93 million -- a vast improvement over 2022.
Now that SoFi delivered a quarterly profit, the biggest question is whether it can sustain this momentum. During the fourth-quarter earnings call with analysts, CEO Anthony Noto said the the company is "positioned to continue to drive positive GAAP net income in 2024." Noto provided longer-term guidance as to what the company is forecasting over the next few years.
Management believes that SoFi can grow revenue at a compound annual rate between 20% and 25% through 2026. But more importantly, Noto made clear that this level of revenue growth should also lead to expanding earnings per share (EPS).
This is important because it showcases management's bullish outlook over the next few years. Noto and his team have said that while revenue acceleration should continue, growth is also forecast to make meaningful impacts on cash flow and profits -- potentially setting SoFi up for even further gains beyond 2026.
Is SoFi stock a good buy now?
As I've expressed before, SoFi is misunderstood. I think some skeptics view SoFi as just another bank. However, while banking is at the root of SoFi's mission, the company is more of a tech-enabled platform. Therefore, it's more challenging to accurately value a company that competes with traditional banks in a tech-heavy fashion.
The chart below illustrates SoFi's price-to-sales (P/S) multiple benchmarked against other tech-banking services.
SOFI PS Ratio data by YCharts.
At a P/S of just 3.6, SoFi stock trades at a steep discount compared to some of its peers based on this metric.
One word of caution to investors considering a position in SoFi: Be prepared to play the long game. I think it will take quite some time for more institutional investors to get on board with SoFi and see the company as a disruptive force encroaching on larger legacy players.
With that said, I'm encouraged by the fourth-quarter results and the profit. More importantly, Noto's comments about the future boosted my confidence as an investor.
With increasing revenue and profits forecast on the horizon, the ride could just be getting started for SoFi. Now could be a terrific opportunity to scoop up some shares.
