In the banking sector, an industry that has long been ripe for disruption, SoFi Technologies (SOFI 3.69%) has found tremendous success. The business prioritizes offering a superior customer experience, which is bolstered by a digital-only operation.
Shares are currently 67% below their peak price, but they have climbed roughly 20% in the last 12 months. Bullish investors are hoping the good times can continue. If we look out over the next three years, where will this fintech stock be?
Growth is key for SoFi
If history is any indication, there's a high likelihood that SoFi will be a much larger corporation in 2027. Rapid growth has been the main aspect of the company's story up until this point.
Headwinds like higher interest rates and general economic uncertainty have resulted in challenges for many businesses, but SoFi continues humming along. Revenue and customers increased by 35% and 44%, respectively, in 2023 compared to the previous year. And these figures are light-years ahead of what they were in 2020.
The company went from offering student loan refinancing solutions at its founding to now being a bank providing an ever-expanding list of services. SoFi offers personal loans and mortgages, as well as credit cards, checking and savings accounts, and brokerage services.
With more products introduced over time, the cross-selling opportunities will only rise, leading to greater revenue potential and customer who stick around to buy more products.
In the past couple of years, personal loan originations have grown quickly to become the largest part of the company's balance sheet. But with student loan repayments resuming, maybe SoFi can get back to its roots and register strong growth with this lending product in the near term.
Between 2023 and 2026, management expects revenue to rise by 20% to 25% per year. That's certainly an encouraging outlook that investors can be optimistic about.
Hoping for sustainable profits
It shouldn't come as a surprise that SoFi has largely been unprofitable throughout the course of its history as executives were aggressively reinvesting capital back into the company to grow and bring on new customers. This was the correct move, especially because of the huge opportunity to disrupt the banking industry.
However, SoFi has turned the financial corner. The business reported its first-ever profit under generally accepted accounting principles (GAAP) in the fourth quarter of last year, bringing in $48 million. This was after losing $320 million in 2022 and $484 million in 2021. Net income for the full 2023, was negative $300 million.
It appears as if SoFi has reached a certain scale that it is on a path of sustainable financial performance. Operating a fully digital business model, without the need for physical bank branches, should have some benefits as it eliminates a huge overhead expense. Ally Financial, another online-only bank, has averaged a 21% net profit margin in the last five years.
Should SoFi get anywhere near this figure, it would be a financial boon. In fact, the leadership team predicts that earnings per share will come in between $0.55 and $0.80 in 2026, compared to a $0.36 loss last year.
About valuation
Considering SoFi's past, while also looking at where things stand today, investors should be encouraged by the trajectory of this business. It's not difficult to believe that the company will be able to grow its revenue and net income at strong rates.
But for shareholders to have a winning outcome, the valuation also plays a key role. Right now, the stock trades at a price-to-sales (P/S) multiple of 3.8. That's below the historical average of 4.3.
Assuming the valuation ratio is the same three years from now as it is today, I think investors will see solid returns. In this scenario, it will all depend on SoFi's ability to grow its top and bottom lines.
