Smartphones and the internet are enabling a rapid change in the consumer banking sector. Out are the stodgy bank branches and long waiting times. In are digital-only financial services operated solely through smartphone applications.
One of the leading online bank disrupters is SoFi Technologies (SOFI 0.31%), which now has close to 11 million users of its consumer finance tools and is quickly growing its earnings power.
Shares of SoFi have rocketed 181% higher in the last 12 months. Does that make it a millionaire-maker stock you need to add to your portfolio today?
Rapid customer adoption with high-yield savings
Many readers will know of SoFi for its high-yield savings accounts. As of this writing on July 2, savers can earn 3.8% annual interest when depositing money with the company, which blows the rates offered by the legacy banks out of the water.
This has led to major deposit inflows to the platform. Just last quarter, the company added $2.2 billion in banking deposits, which now fund the majority of its loan portfolio.
It's able to offer such high interest rates because it is an online-only bank built with modern digital tools. It does not have major overhead costs with bank branches, leading to tons of annual cost savings.
Plus, legacy banks take advantage of customers' lethargy by understanding most will not take their deposits elsewhere even if their bank account is earning a measly interest rate. With the rise of digital banking and easy money-transfer services like Zelle, it is now much more convenient to move your money from one bank account to another.
This is why so many customers are banking with SoFi. It now has 10.9 million members using one if its financial services products, up from under 1 million in 2019.
Image source: Getty Images.
A comprehensive consumer finance platform
After attracting customers to SoFi Bank with high interest rates paid on deposits, the company's next step is to sell them on new financial services to generate revenue and loan income. SoFi aims to become a one-stop shop for an individual's personal finance needs. Its products include credit cards, personal loans, an investing brokerage, insurance, and more.
Now, it is building a membership program called SoFi Plus, where users either sign up for direct deposit or pay a $10 monthly subscription fee. In return, members can qualify for cash back on credit card purchases, have SoFi provide a match on some deposits to investment accounts, and get to use SoFi's wealth management tools. The company wants to be the backbone of someone's personal financial needs and has finally built out the full suite of products needed to do so.
NASDAQ: SOFI
Key Data Points
Revenue and net earnings have zoomed higher because of all these new products that its members are adopting. Adjusted net revenue grew 33% year over year last quarter to $771 million, driven by 101% growth in financial services and 25% growth in lending. SoFi's credit metrics on loans are performing well, too, which was a big concern for a fast-growing lender getting into personal loans.
Lastly, we cannot forget SoFi's platform that outsources financial technology services to third parties, such as issuing credit cards. The technology platform generated over $100 million in revenue last quarter with strong profit margins.
SOFI Net Income (TTM) data by YCharts; TTM = trailing 12 months.
Is SoFi a millionaire-maker stock?
Due to its increasing scale in lending, payments, and other services like investing, SoFi is gaining a ton of operating leverage and generating a profit. Net income was $71 million last quarter and $482 million over the last 12 months after many years of negative earnings.
The digital banking model is working now that SoFi has sufficient scale, even as it invests heavily in product and growth. Last quarter, it spent $156 million on product development and $238 million on marketing.
I expect even more leverage on these expenses in the years ahead as SoFi gets larger, leading to improved profit margins. It is hard to pinpoint exactly what earnings can grow to, but we can make some rough estimates.
If revenue doubles or triples -- which could happen somewhat quickly due to how fast SoFi is currently growing -- then earnings may go up fourfold or fivefold because of the leverage over its fixed cost base. That could lead to annual net income of $2 billion to $3 billion a year.
Today, SoFi has a market cap of $20 billion. That would give the stock a forward price-to-earnings ratio of 10 if the company generates $2 billion in annual net income, which is cheap for a fast-growing company, despite the fact that banks typically get a below-average earnings multiple. For this reason, SoFi still looks like a millionaire-maker stock after rising close to 200% in the last 12 months.
