SoFi Technologies (SOFI 0.31%) hasn't fully benefited from the favorable market environment that's seeing some stocks hit fresh records. Yes, shares soared 116% in 2023. But they still remain 71% below their all-time high. That's partly due to a significant loss so far this year.
Don't be discouraged. This fintech stock has some positive traits that warrant a closer look. Here's what investors should know.
Finding remarkable success
In the internet age, companies that are able to provide customers with a better user experience are going to find success. That's certainly been the case with SoFi. Its current customer base of 7.5 million is fourfold larger than it was just three years ago.
This is a fully digital bank with no physical branches. That helps hold down overhead costs and attract a younger and more affluent clientele. That latter factor helps lead to better loss ratios. Moreover, SoFi's success has spurred banking heavyweights to also start investing in their own digital efforts.
I touched on the company's customer growth. This has resulted in tremendous revenue gains. Last year, SoFi reported that its revenue increased 35% year over year to $2.1 billion. This represented a slowdown from previous years, but it's an impressive gain no doubt.
Shareholders are excited about the fact that SoFi generated its first net profit in Q4 in accordance with generally accepted accounting principles (GAAP). Management expects the bottom line to skyrocket in the years ahead, as the business starts to scale up and leverage its operating costs.
NASDAQ: SOFI
Key Data Points
The issue with bank stocks
I think there's a lot to like about SoFi. But investors should know about certain factors that make investing in banks stocks unappealing. Not only is there intense competition in the industry, from huge global financial institutions all the way to small credit unions, but banking products are largely commoditized with little opportunity for premium pricing. Moreover, banks experience cyclicality dependent on changes in interest rates and the health of the economy.
To SoFi's credit, though, it has clearly found what works in bringing on new customers in droves, increasing revenue, and getting to improved profitability. The hope for shareholders is for this trend to continue in the years ahead.
I'll also point to the company's surging deposit base, which went from $7.3 billion at the end of 2022 to $18.6 billion at the end of last year. SoFi offers one of the highest savings rates in the industry, helping it draw in deposits that can fund loan originations. This is a clear indicator of its recent success. Moving deposits to SoFi could be the start of a customer potentially using many more of the company's products over time.
Is the valuation attractive?
With the stock currently down 23% in 2024, investors can scoop up shares at a price-to-sales (P/S) ratio of 3.3. That's cheaper than SoFi's historical average. For businesses that are registering huge growth, like SoFi is, the P/S multiple is a popular valuation tool.
But given that this is a banking enterprise, the price-to-book (P/B) ratio is also a worthwhile method. This compares the company's stock price to its book value per share.
Because banks typically have to report their assets and liabilities on the balance sheet at market value, looking at book value can give us a decent estimate of what SoFi should be worth. As of this writing, the stock carries a P/B ratio of 1.48. A number under 1 is considered to be undervalued, but that's for a more mature bank that might not have the sizable potential SoFi does.
The market is valuing SoFi as a combination of a bank and tech stock. I believe this is a fair perspective. The business has performed remarkably well in a higher-rate environment. Of course, investors should watch the fundamentals to make sure SoFi continues posting solid growth and rapidly increasing earnings.
This is a stock to consider buying and holding for the next five years.
