SoFi Technologies (SOFI 2.25%) -- the online bank that went public in 2021 -- has moved past its origins as a lending cooperative and its status as a hyped-up initial public offering (IPO) stock. It's been demonstrating profitable growth at scale and has huge long-term opportunities. So why is its stock down 30% this year?
Let's see what's going on, and why one Wall Street analyst still sees more than 70% upside over the next year or so.
Another great quarter
SoFi reported another outstanding quarter with accelerating revenue growth, more members, and net income beating expectations all around.
Revenue increased 37% year over year in the 2024 first quarter to $645 million, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 91% to $144.4 million. Net income was $88 million, including a one-time benefit.
Members and products both increased 35% year over year, with 622,000 new members for a total of 8.1 million and 989,000 new products for a total of more than 11 million. It has reported increases in members and products every quarter since going public, or the past 17 consecutive quarters.
Image source: SoFi Technologies.
Lending segment revenue slightly decreased year over year, but higher balances drove a 33% increase in net interest income. Originations were up in all of its lending categories of personal, student, and home, with home loans soaring 274% year over year.
Plenty more opportunity
Has SoFi maxed out? It seems like the opposite -- it's just getting started. CEO Anthony Noto said that, as in previous quarters, 90% of deposits are coming from direct deposit members, and these are high-quality professionals with solid credit.
That's boosting debit spending, which has tripled year over year to $1.9 billion. It's also driving the cost of funding lower, leading to an expanded net interest margin of 5.9%. The banking segment reported net income of $100 million with a 21% margin and an annualized return on tangible equity of 11.7%.
Since it targets students and young professionals, SoFi can develop and maintain relationships over time and benefit from high lifetime client value and years of growth.
SoFi uses what it calls its financial services productivity loop strategy to drive higher product adoption from current members, and that also leads to higher revenue per user, lower cost to serve, and improved profitability. As these trends continue to play out, the numbers are likely to get higher.
Is the upside already priced in?
The stock price drop seems counterintuitive; as soon as SoFi reported a second-straight quarter with profits, beating expectations, the stock dropped, and it hasn't recovered.
This is likely a short-term reaction, and it's something important to know about possible market outcomes. The market isn't always rational and there's no way to know in advance how the market will react to a particular piece of news.
That said, there are typical reactions to certain reports. When there's an expectation for a particular milestone, a stock price can often soar as it gets closer. SoFi stock gained 115% last year as management repeatedly said it would become profitable in the fourth quarter. If the milestone is reached, all of that pent-up expectation can deflate.
Short-term investors often bet on these types of scenarios and then pull out their winnings. This is one example of how short-term investing can be risky.
The average Wall Street consensus price target for SoFi stock is a more modest 29%, but John Hecht at Jefferies has a price target of $12 -- 72% higher than today's price. That was actually a price cut from $15. As SoFi reaches its short-term goals, some analysts are seeing lower upside.
However, long-term investors shouldn't feel let down or be confused by what's happening with SoFi stock. Its consistently strong results just confirm that it's an excellent company, and it has incredible long-term opportunities. Some of the expectations for profits might have been priced into the stock as it exited 2023, but it has still retained much of its gains, and it's up 42% over the past year.
It's important to ignore the noise and focus on the fundamentals. That way you avoid risk and build up positions in top stocks that will reward you down the line.
