Shares of SoFi Technologies (SOFI 0.70%) have been rocketing higher in recent months. They are up 116% since late July, as investors appear to be growing incredibly optimistic about the company's prospects.
Anthony Noto, SoFi's CEO, is certainly helping drive the market's enthusiasm. He just delivered fantastic news for investors in this fintech stock.
Easy to be an optimist
SoFi recently revealed its financial results for the fourth quarter of 2024 (ended Dec. 31), and there's not much to complain about. Revenue jumped 26% year over year to $2.7 billion for the full year. The business now has over 10.1 million customers using nearly 15 million different products. These are all records.
But investors might want to focus on profitability. SoFi has now reported five straight quarters of positive GAAP net income. And 2024 was the company's first full year operating in the black, as adjusted net income totaled $227 million, a major improvement from the $54 million net loss posted in 2023.
SoFi's individual segments are performing well. The contribution margin, which measures revenue minus variable costs, was 45% for financial services, 31% for the technology platform, and 59% for lending in the fourth quarter. Each business line is operating profitably.
NASDAQ: SOFI
Key Data Points
Looking ahead
Noto and his leadership team have their sights set on notable bottom-line improvements as we look to the future. When SoFi reported its Q4 2023 financial results a year ago, it revealed a bright outlook.
Management forecasts earnings per share (EPS) will total $0.68 (at the midpoint) in 2026. In the years after that, the expectation is for EPS to increase at a compound annual rate of 20% to 25%. This would mean that in 2029, SoFi is projected to register EPS of $1.25, 733% higher than in 2024. That would be an outstanding outcome.
It's not unreasonable to believe this is a realistic trajectory for SoFi. Executives only expected EPS of $0.07 to $0.08 last year, but ended up doubling that. Perhaps Noto's previous job working as a sell-side research analyst at Goldman Sachs covering internet stocks has given him valuable insights into how to properly manage the market's expectations.
SoFi's business model is also set up to see rapidly rising earnings. Operating a fully digital platform means the company doesn't need to tie up capital or deal with the overhead of running physical bank branches. This can lead to more efficiency.
Two of SoFi's largest expense categories are technology and product development and sales and marketing. Of course, no investor wants to see management drastically cutting these costs, as it could undermine the company's ability to grow. But it's worth pointing out that despite those two expense items increasing just 10% in total in 2024, SoFi was still able to boast fantastic revenue and customer growth.
SoFi's valuation
This fintech stock has been on fire in recent months. Impressive financial performance definitely helps.
Besides fundamental strength driving market sentiment, maybe investors are bullish about the economic landscape in 2025 and beyond. A favorable backdrop would undoubtedly benefit a banking entity like SoFi, with its ability to attract deposits and satisfy loan growth.
But as things stand today, I believe the valuation has gotten stretched. Shares traded at a compelling price-to-sales (P/S) ratio of 2.7 in August last year. Right now, they can be purchased for a P/S multiple of 6.8. Investors should consider the high expectations embedded in the current valuation.
Given the potential for earnings to skyrocket in the years ahead, it's probably surprising that I don't view SoFi stock as a no-brainer buying opportunity today. That's because I believe there's no longer a margin of safety. The best move now is for investors to watch patiently from the sidelines for a better entry point.
