2024 has been another painful year for SoFi Technologies (SOFI +1.79%) investors. The financial services app is down around 20% and now off 71% from all-time highs set in 2021. All the while the S&P 500 index and Nasdaq market indices are soaring. Banks and lenders have struggled in recent years as the Federal Reserve raised interest rates at one of its fastest paces in history, presenting a headwind to these businesses.
SoFi just reported earnings for the second quarter. Membership keeps growing quickly, but the stock still remains stuck in the mud. What is going on with SoFi Technologies? Can it get the stock turned around over the next few years?
Let's take a deeper dive into this earnings report and find out.
A fast-growing one-stop shop
Marketing itself as a one-stop digital shop for consumer finance, SoFi has a broad range of products for customers. These include checking and savings accounts, an investing brokerage, credit cards, personal loans, refinancing student loans, and even mortgages. Offering high interest rates on deposits -- it paid an average of 4.24% on interest-bearing deposits last quarter -- the company hopes to offer a better value proposition than the big legacy banks that pay minimal interest rates to customers.
So far, this strategy has worked wonderfully. Total SoFi Members hit 8.77 million in the second quarter, growing 40% year over year and up from 2.28 million at the start of 2021. Importantly, it now has $21 billion in consumer deposits, which added $2.2 billion to the balance sheet last quarter. SoFi acquired a banking license only at the start of 2022, making this growth all the more impressive. These loans can be used to grow SoFi's lending business, which is how a bank makes money.
NASDAQ: SOFI
Key Data Points
Rising loss rates and minimal history of profits
On the lending side, SoFi offers personal loans, student loans, and home loans to its customers. The majority of the loans sitting on its balance sheet currently are personal loans. Investors are likely worried about rising loss rates with these loans. Last quarter, the charge-off rate -- meaning the amount of loans the company estimates are in default -- rose to 3.84% from 3.45% in the first quarter. Management says these are within its models and that loans are performing better now than back in 2017.
It's not all bad within the lending side of things for SoFi. In fact, the company's net interest margin (NIM) expanded slightly to 5.83% in the second quarter. A rising NIM means a rising spread between the interest SoFi pays depositors vs. the interest it brings in from loans (i.e., its net interest revenue). This is a good thing and shows that SoFi's banking business is running smoothly. Just keep a watchful eye on the trajectory of net charge-offs for personal loans.
Overall, it is likely that SoFi's stock is down because of its short history of profitability. It has only been the last three quarters that SoFi flipped from a net loss to positive net income. It has never generated over $100 million in quarterly net income. Now, with charge-offs rising, Wall Street is pessimistic that profits will improve in the coming years.
SOFI PE Ratio (Forward) data by YCharts
The stock is down, but is it a buy?
Investors are quite bearish on SoFi's prospects, which is why the stock is down 71% from the 2021 price peak. However, I think this is misguided and doesn't look at the big picture. For one, management is still spending aggressively to acquire customers. Marketing spend was close to $200 million just last quarter. This spend is working -- look at how fast SoFi's customer count is growing -- but sacrifices short-term profits. Long-term investors should applaud this move.
Second, SoFi is not just a lending business. Net revenue from its financial services division was $176 million last quarter and growing 80% year over year. It has a technology platform for outsourcing digital banking software for other financial institutions that's generating $95 million in high-margin revenue each quarter. These segments diversify SoFi's business from personal loans. This is not just a risky consumer lender, but a consumer finance platform with many different revenue-generating segments.
Today, SoFi trades at a forward price-to-earnings ratio (P/E) of 80, which looks high on its face. The average fast-growing stock will trade at a P/E between 30 and 40. Net income in 2024 is supposed to be only $175 million-$185 million, according to company guidance. Remember, though, that SoFi is still spending a ton on marketing to acquire new customers, which is suppressing profitability.
As long as the company continues to grow its members and revenue at a healthy clip while also maintaining a slightly positive net income, investors should be happy with SoFi's business trajectory. Management is going after a huge consumer banking opportunity in the United States, setting the business up to generate a healthy amount of profits within a few years. Stay patient; now looks like a good time to buy shares of SoFi.
