SoFi (SOFI 4.48%) has been one of the most impressive growth stories in the market. The banking disruptor added more than 900,000 members in the third quarter alone, its highest number of additions ever, and revenue grew by 38% year over year, an acceleration over last year's already strong momentum. Plus, profits have been much stronger than experts had predicted, and the company is finding innovative ways to grow while managing risk at the same time.
CEO Anthony Noto has said that he hopes to scale SoFi into a "top 10" financial institution. Currently it's No. 53, according to the Federal Reserve's latest data. To crack the top 10, it would need to roughly 10X its asset size (for context, Bank of New York Mellon (BNY +0.00%) is currently No. 10).
Image source: SoFi.
Recently, Noto's comments have called for even more aggressive growth. In May, Noto said that his goal is to have 50 million members by 2030, with a total of 150 million products between them. SoFi members currently have about 18.6 million products, so this implies more than 700% growth in less than five years.
Then, at a recent investment conference, Noto gave a jaw-dropping prediction by saying that SoFi's ambition is to become a trillion-dollar company. There is no bank stock in the United States that has reached a trillion-dollar valuation yet, so this is a bold target. Just to put the numbers into perspective, a trillion-dollar market cap would be about 31 times SoFi's current valuation. Could this fast-growing fintech get there?
SoFi's trillion-dollar opportunity
To be sure, SoFi is still in the early stages of growth. Its membership base is growing at a 35% rate, and the company's unaided brand awareness in the United States is less than 10%. To say there's still room to expand is an understatement, and I don't think the goal of 50 million members and 150 million products is unreasonable. Bank of America has about 70 million customers between consumers and small businesses, and it's not uncommon for a bank's customer base to average three to four products per person.
NASDAQ: SOFI
Key Data Points
Several potential catalysts could continue to drive SoFi's business growth and ultimately lead to a trillion-dollar valuation.
For one thing, SoFi's lending business isn't just growing -- it's evolving. The company is focusing on its loan platform business, which includes originating loans on behalf of third parties, packaging loans for sale to investors, and referring loan customers to other companies, thereby generating fee income.
Student loans are a big potential growth area, especially if the Department of Education moves forward with its plans to privatize parts of the $1.7 trillion federal student loan program. SoFi has the tech stack in place to become a major student loan service provider (after all, the company started as a private student lender).
Furthermore, SoFi is rolling out innovating and engaging products that could serve to grow its ecosystem and revenue base. Recent additions include the relaunch of cryptocurrency trading and the blockchain-powered ability to send money internationally quickly and cheaply. In fact, Noto believes SoFi can be a leader in digital asset adoption for both retail and institutional clients. However, there is considerable potential to expand the product suite further over the coming years.
Profitability could be a big driving force of a higher valuation. Because of its lower cost structure compared to peers and the composition of its loan portfolio, SoFi has excellent net interest margins that are more than double those of most major banks. As the business scales, I expect bottom-line earnings to grow rapidly.
Finally, there's the Galileo technology platform that SoFi aims to use to become the "AWS of fintech." The company has reported some big wins recently when it comes to providing the infrastructure for co-branded reward debit cards, including Wyndham Hotels & Resorts' unique debit card rewards program and the Southwest Airlines (LUV 7.37%) Rapid Rewards Debit Card.
Could it happen?
It's worth reiterating that no company in the banking or financial services industry has scaled to the trillion-dollar level yet. JPMorgan Chase (JPM 1.61%), the largest bank in the United States with trillions in assets, has a market cap of about $820 billion as of this writing.
However, that doesn't necessarily mean SoFi would need to scale to the point where it is the largest bank in the U.S. to get to the trillion-dollar level. Keep in mind that SoFi is an exclusively online bank and should produce significantly better margins at scale, compared with its branch-based counterparts. Plus, SoFi does a lot that the big banks don't do -- such as the Galileo technology platform -- that could potentially become extremely valuable business components.
To be sure, SoFi would likely need to break into the top five U.S. banks at a minimum to join the trillion-dollar club, and while it would certainly take a lot to get there, it isn't impossible by any means over the next couple of decade. After all, until a wave of consolidation in the late 1990s, neither JPMorgan Chase nor Wells Fargo (JPM 1.61%) were among the top five. Noto has an ambitious vision for SoFi, and he's done a fantastic job of executing so far.
