The banking industry is one of the oldest around. But it's also one of the largest, as everyone requires financial services at some point in their lives. This creates opportunities for innovative companies to carve out a niche in the huge sector.
Knowing that people would value a tech-enabled platform, SoFi Technologies (SOFI 4.24%) has found tremendous success since its founding more than a decade ago. But its shares have historically been a major disappointment, as they trade 71% below their peak price from February 2021.
Should investors buy, sell, or hold this fintech stock?
Reasons to buy and hold SoFi stock
SoFi's ability to provide a superior user experience is one reason to buy and hold the stock. The business runs no physical bank branches, instead leaning heavily on its digital capabilities to serve its user base. Consequently, SoFi targets a more affluent and younger demographic, which is a positive characteristic. These customers introduce lower credit risk, and they can be customers for a long time.
Growth has been the key driving force. The company's revenue and user base has expanded rapidly over the years, thanks to strong product innovation and effective marketing strategies.
What's also remarkable is that SoFi's deposits increased from $7 billion at the end of 2022 to $23 billion at the end of the last quarter. It's encouraging to see the company grow a valuable low-cost source of funding. It also helps that SoFi offers one of the best savings rates around. Deposits are usually sticky, which should lead to switching costs for customers.
SoFi avoids the expenses associated with developing and operating bank branches. So, in theory, the business should be able to scale up profitably as its sales grow. We're seeing this play out in front of our eyes.
The company has now reported three straight quarters of positive GAAP net income, a wonderful milestone that could be the start of a profitable era for SoFi. Executives think earnings per share (EPS) will total $0.68 (at the midpoint) in 2026, compared to a forecasted $0.07 to $0.08 this year. After 2026, analysts project EPS to grow between 20% to 25% annually. These would be fantastic gains.
Another reason to buy the stock is because of its reasonable valuation. Shares trade at a price-to-sales ratio of 3.1. That's well below the historical average of 4.1. Should SoFi's fundamental performance continue to impress, that valuation multiple could expand.
Reasons to sell SoFi stock
One reason the market might turn cool towards SoFi stock is because it believes the company's growth will slow down dramatically sooner rather than later. Maybe these critics don't think SoFi will achieve management's targets when it comes to EPS growth over the next few years. Of course, it will take time to know how everything plays out.
SoFi's trajectory has been impressive thus far, but competitive forces could get in the way. All the major banks, including JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, are investing aggressively in technological and digital capabilities to drive internal efficiencies and better serve their customer bases.
Investors might also not like how SoFi's balance sheet has shifted. In the past six quarters, the business originated $21.3 billion worth of personal loans, compared to just $4.1 billion in student loans. Personal loans generate higher returns, but that's because they are riskier lending products. This potentially makes SoFi vulnerable should a severe recession occur that affects borrowers' ability to make payments.
It's important to understand these bear arguments. However, I believe the reasons to buy and hold this stock are more compelling. Adding SoFi to your portfolio looks like a smart move.
