Investing in innovative and disruptive businesses that are challenging the status quo can be a smart way to allocate capital. That's because if they are successful, these companies could generate serious returns for shareholders. One fertile hunting ground is in the fintech industry.
A notable business in this space is SoFi Technologies (SOFI +0.66%). The popular digital bank's stock has soared 225% in the past year (as of Aug. 19). Just in the last four months, shares have jumped 113%. Investors are clearly bullish.
Is SoFi a millionaire-maker?
Image source: SoFi Technologies.
Finding success in a massive industry
The banking industry is well-known for having some huge players dominate. JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup have a deep and broad presence. There are also many regional banks scattered across the U.S. It might be a surprise that this massive and established market has seen a newcomer step up in SoFi.
But this is exactly what the business has done. By leveraging technological capabilities and a digital-only presence, SoFi has won over customers with its user-friendly platform. As of June 30, the company had 11.7 million members in total, up 34% year over year. This exploding user base helped drive a 43% revenue gain.
CEO Anthony Noto sees SoFi one day becoming a "top 10 financial institution." For what it's worth, the 10th largest financial institution in the U.S. is Bank of New York Mellon, with total assets of $398 billion. SoFi's $41 billion asset base means that it still has a long way to go. However, the current trajectory does nothing but give investors confidence that management's goal is achievable.
SoFi's suite of products and services gives it the ability to cross-sell to its customer base, which can lead to higher revenue per user over time. For instance, someone in college might initially only need a student loan from SoFi. But over time, this person could open checking and savings accounts, get a credit card, and take out a mortgage.
SoFi's success should continue, especially since the leadership team keeps being inventive. The company is making moves in crypto. SoFi will once again allow customers to buy, sell, and hold certain digital assets. The business also just announced a partnership with Lightspark to facilitate fast and cheap international money transfers using the Bitcoin network. These launches could bring in new customers and new revenue sources.
Building a sustainable business model
SoFi's growth is all the more impressive because it has enabled the company to become consistently profitable. During the latest quarter, the company reported adjusted diluted earnings per share of $0.08, up 700% year over year. For the full year, management forecasts $0.31. And with revenue expected to grow at a compound annual rate of 24.6% between 2024 and 2027, it's easy to be optimistic that the bottom line will rapidly expand as well.
SoFi doesn't operate any physical branches that its larger peers in the industry have. This eliminates a major cost contributor. Consequently, SoFi can spend more on product development and marketing efforts, which are perhaps the most important areas it can focus on to win over customers.
NASDAQ: SOFI
Key Data Points
SoFi's long-term potential
After the stock's monumental rise in recent months, the valuation isn't that attractive anymore. As of Aug. 19, shares trade at a forward price-to-earnings ratio of 72. This bakes in a lot of success in the not-too-distant future. However, if you believe that SoFi's profits will be much higher in a few years, then the current valuation won't deter you.
Investors who can put more money to work and who have a longer time horizon have a shot at becoming millionaires from this stock. But it's important not to put all your faith in a single company supporting your financial wellbeing.
