Financial services businesses aren't exactly the most exciting. However, banks and brokerage stocks have proven to be solid investment choices over a long-term horizon.
In fact, billionaire investor Warren Buffett has held positions in financial services companies, including American Express, Visa, Mastercard, and Bank of America, for years. The main reason for his conviction is that despite the mundane nature of these businesses, they tend to generate steady cash flow and strong earnings in the long run.
Like many industries, innovative technology has started to make its way into traditional banking. One company that I see as a leader in financial technology is SoFi (SOFI 2.25%). However, considering shares are down nearly 30% so far this year, you might think SoFi is a bust.Let's break down why now looks like a great time to buy the dip in SoFi stock and begin building a long-term position.
SoFi is finally profitable, but...
I wouldn't be surprised if you're unfamiliar with SoFi. Unlike Wells Fargo and JPMorgan Chase, SoFi does not have any brick-and-mortar bank locations. Instead, the company spent years acquiring technology platforms such as Galileo and Technisys, and used these assets to build a digital app for all of its banking features.
SoFi's mobile-first offering has resonated well with younger demographics such as millennials and Gen Z. During the first quarter of 2024, SoFi added over 620,000 new members to its platform -- an increase of 44% year over year.
What makes SoFi's approach so lucrative is that by offering many different products and services on the app, the company has a unique ability to cross-sell at a high rate. As a result, SoFi's sticky user base allows the company to spend less on customer retention efforts over time.
The chart below illustrates that after years of hefty spending on building out its capabilities as well as aggressive marketing campaigns, SoFi has finally reached consistent profitability. The problem? I don't think Wall Street is noticing.
SOFI Net Income (Quarterly) data by YCharts
...can the company keep the momentum going?
Following its first-quarter earnings call on April 29, SoFi stock experienced a nearly 10% sell-off. Although shares have rebounded, the stock is still vastly underperforming the S&P 500 this year.
I see a couple of reasons for the skepticism surrounding SoFi stock.
First, the fintech realm is crowded. Start-ups such as Plaid, Stripe, and Chime are all rising in popularity. Moreover, businesses including Upstart, Block, Affirm, PayPal, and Robinhood each compete with SoFi to varying degrees. Considering the level of optionality, it's easy to overlook the prospects of any given business.
The bigger reason I think investors have soured on SoFi stock is due to the company's guidance. During the first-quarter earnings call, SoFi's management issued guidance for next quarter that felt uninspired.
However, investors should remember that fintech stocks are cyclical. Financial trends are almost certainly going to vary quarter to quarter. This makes sense considering that financial services businesses are highly sensitive to macroeconomic variables such as inflation and interest rates.
For the full year 2024, SoFi's management raised its guidance for both revenue and profits. So even though quarterly trends may swing one way or another, fintech businesses tend to be quite strong in the long run.
Image source: Getty Images.
Is now a good time to buy SoFi stock?
When analyzing the chart below, it's clear that at a price-to-sales (P/S) ratio of just 3.0, SoFi stock is valued at a discount compared to most of its peers. Interestingly, SoFi's P/S is aligned with more mature businesses such as PayPal and Block.
SOFI PS Ratio data by YCharts
I think investors are missing the forest for the trees with SoFi stock.
But with the company still very much in growth mode, I think investors need to accept that there will be some volatility in SoFi's near-term operations.
By employing a long-term time horizon, I think it's more clear that SoFi is on a path to consistent profitability -- just like each of Buffett's high-conviction positions explored above. With shares down considerably so far this year, I think now is a great opportunity to take advantage of depressed price action and build a position.
