The market is becoming more optimistic about SoFi Technologies (SOFI 3.22%): As of Feb. 7, its shares had risen by 132% over the prior six months, and after trading mostly below $10 for about two and a half years, they're now changing hands at nearly $15.
The fintech stock is still 42% below its peak, but the company is on a solid footing. Does this mean SoFi is a worthy investment candidate now?
Building a competitive moat
The financial services industry is massive. The U.S. alone has more than 4,000 banks, all offering a wide array of products that cater to individuals, corporations and institutions, and even governments. SoFi has successfully carved out a niche serving everyday consumers.
The company might just be 13 years old, but I'd argue it's starting to develop an economic moat. For starters, management has always focused on providing an exceptional user experience by operating a fully digital model and leaning heavily into technological capabilities. That strategy is working. Its customer base has expanded by almost 200% in the past three years, and now totals more than 10.1 million. The overall banking sector is very mature, so when a company can add new members this quickly, it's a clear indicator that it's doing a fantastic job serving them.
And as these customers are using more of its financial products over time, SoFi is likely benefiting from switching costs as well. Think about the headaches involved in changing your banking provider, especially if you have your checking and savings accounts, student loans, and credit cards, for example, all provided by one institution.
Becoming financially sound
SoFi is starting to benefit from cost advantages as well. This is often the case for businesses as they scale up: Rising revenues more than offset the added costs of a less-rapidly-rising expense base. The result is improving profitability.
In 2023, SoFi's sales & marketing and technology & product development expenses combined were equal to 58% of its total net revenue. In 2024, that share shrank to 50%. Management has emphasized making the bank's operation more efficient, but that hasn't gotten in the way of growth.
Instead, SoFi is now consistently profitable. It has reported five straight quarters of positive net income. And in 2024, its adjusted net profit margin was 8.7%.
It looks like the good times will keep rolling. Executives are forecasting earnings of $0.26 per share (at the midpoint of their guidance range) in 2025, compared to the $0.15 per share SoFi booked in 2024. And by 2027, the consensus estimate among Wall Street analysts covering the bank is for earnings of $0.75 per share. This outlook is extremely encouraging, though it should be taken with a grain of salt.
Nonetheless, it looks like SoFi has turned the corner financially with a sustainable business model. That reduces risk for shareholders.
Be patient
The market is fully aware of SoFi's fundamental strengths, particularly with regard to its growth and profitability. This has been reflected in the stock's performance.
Because of that, the investment opportunity here isn't nearly as attractive as it was six months ago. In early August, shares traded at a price-to-sales (P/S) ratio of 2.7. In hindsight, one can see that was an incredible deal.
Today, shares trade at a P/S multiple of 6.2. This is significantly more expensive than the bank's historical average P/S ratio of 4.2.
In short, investors have bid up the valuation to reflect SoFi's improved prospects. But they have bid it up far enough that I don't think the stock is a smart buy anymore. Yes, this is a good business that has made a name for itself in a competitive industry. However, I'm not comfortable paying the current valuation for this financial services company. For now, I'd recommend adding SoFi to your watchlist.
