SoFi Technologies (SOFI 3.69%) stock is down almost 70% from its 2021 high, but the company just hit a major profit milestone and could generate double-digit annual revenue growth for years to come.
Originally named MoneyLion, SoFi was created when its founders were researching artificial intelligence (AI) at Purdue University in 2013. In 2017, the company's toxic work culture became public, and new management took over. This leadership team brought new growth plans that are still unfolding today.
Three businesses in one
SoFi Technologies is a combination of a fintech platform and a bank, helping its customers borrow money, save, and invest. This provides the benefits of diverse revenue streams and the ability to cross-promoting its businesses.
Its largest segment is lending, which accounted for well over half of the company's 2023 revenue. Lending grew 21% year over year and is SoFi's bread and butter, because once a relationship is created when generating a home loan, it's easier to upsell these customers on the company's other products.
Its smallest and most speculative business is its technology division, which includes a digital payments app and a banking platform for financial services companies, among others. Although SoFi's tech segment revenue rose 12% in 2023, it generates just a fraction of its lending sales. Leadership says it's in "revenue acceleration mode," so there could be more growth from these tech products, but this isn't where I see the big potential.
The most important catalyst for SoFi's expansion over the next five years is its financial services division.
115% growth in one year
Starting in 2019, two years after SoFi's management team was overhauled, the company added several financial services products, including SoFi Credit Card, SoFi Invest (online brokerage), SoFi Checking and Savings, among others.
There's a natural harmony among these financial offerings and the popular loans SoFi is known for. The company has lots of chances to sell additional products to customers and to attract new customers.
While financial services is less than one-third the size of lending today for SoFi, it grew an impressive 115% year over year in the fourth quarter, and for the first time ever, helped push the company to a GAAP profit in Q4.
Full-year 2023 revenue for this division was $437 million, a more-than-twofold increase compared to the $168 million reported in 2022.
These numbers indicate SoFi's investments in financial services are paying off. Even though executives say they are heavily investing at a loss in SoFi Credit Card and Invest, the segment still managed to post an 18% profit margin overall. When the up-front spending decreases, this figure should shoot upward.
If nothing else changes, SoFi look like a strong growth stock to hold, but there's one near-term macroeconomic factor that could accelerate its ambitious plans.
One catalyst could speed up SoFi's long-term growth
SoFi's 2023 net revenue was $2.1 billion, up 35% from the previous year. Management forecasts 20% to 25% compound annual growth through 2026 "assuming no meaningful change in the macro environment."
Steady 20% to 25% growth for years sounds pretty good on its own, right?
But here's the thing: Economists expect (and the Fed has signaled) that there will be interest rate cuts this year, and if this plays out as predicted, it should provide a massive boost to SoFi's top line.
SoFi's home loan business would benefit from more expensive home purchases, because higher rates are restricting how much "house" someone can buy today. SoFi Invest would see an uptick from investors searching for higher yields in the market. And SoFi Credit Card would attract new cardholders with lower interest rates. (Credit card interest rates are currently higher than at any point since 1994.)
The Federal Reserve cutting interest rates would light a fire under SoFi's already rapidly expanding financial services segment, which is the core of the company's future growth.
Even if interest rates don't see cuts as expected this year, people will still need to borrow money, save it, and invest it, and SoFi has a proven system for widening its customer base.
Regardless of what happens with the Federal Reserve, SoFi is on track to deliver steady growth for years to come.
A proven growth stock with a bright future
SoFi's largest segment is lending today, but financial services and technology could be its growth engines three to five years from now. This is a unique business compared to a traditional bank and should be valued accordingly.
There are two competitors with segments that resemble SoFi's unique divisions. Robinhood started as an online brokerage, but it's now offering savings products and its CEO has indicated more financial services will be launched soon.
Robinhood is currently trading at about 8 times trailing-12-month sales, while SoFi is quite a bit cheaper at 4 times trailing-12-month sales.
Meanwhile, Ally Financial is much cheaper, with a price-to-sales ratio of just 1.37. That's considerably less expensive than SoFi, but Ally's revenue has barely grown since 2021, while SoFi's has soared 116% over the same period.
SoFi is pricier than Ally, but you're paying more to get into a higher-growth business, and it's still not as expensive as buying Robinhood.
SoFi's lending is a steady, reliable growth engine and one of the best ways for the company to attract brand-new customers, but its financial services will provide the most growth in the near term. I believe this success will cement SoFi's place as the most helpful and accessible fintech company over the next decade.
Leadership is still investing heavily in financial services and the results prove it's a money-making move. This is all playing out while its technology division is moving in a positive direction and could be on track to find better product-market fit, adding another potential growth catalyst over the long term.
