Despite some volatility, SoFi Technologies (SOFI 4.48%), a fintech specialist, has performed well over the past three years, with its shares jumping more than 76% during that period. SoFi still has plenty of upside left, given its outstanding financial results and attractive long-term opportunities.
Here's why the stock is a buy, even after its market-beating performance in recent years.
An expanding ecosystem
SoFi's popularity keeps rising. With more members opting in for more of the company's services, its top line is growing at a good clip. In the fourth quarter, SoFi's revenue increased by 40% year over year to about $1 billion, while it ended the period with 13.7 million members, up 35% compared to the year-ago period. Adjusted net income for the period was $173.5 million, up 184%.
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Some investors are worried that SoFi relies too much on higher-risk personal loans, which could come back to haunt the company, especially if it faces significant loan defaults in the event of, say, a recession. However, SoFi is addressing this problem in multiple ways, including diversifying its revenue mix, particularly through less risky fee-based revenue. In the fourth quarter, this revenue source increased by a faster 53% year over year to $443 million.
SoFi also targets consumers with higher credit scores than the average, which helps mitigate the threat it faces on the personal loan side of the business. So, SoFi's business looks strong right now.
NASDAQ: SOFI
Key Data Points
Look beyond the recent dip
SoFi's shares dropped after it released its latest quarterly update. There were likely several reasons. First, the company's guidance wasn't as strong as expected. Second, valuation remains an issue. SoFi is trading at 35.2 times forward earnings, well above the 15.8 average for financial stocks.
Still, investors looking at the next five years (and beyond) should seriously consider the company. It's not uncommon for smaller, high-growth stocks like SoFi to trade at steep premiums, something the fintech specialist has arguably earned given its strong revenue growth and consistent profitability.
SoFi expects its revenue to grow at a compound annual rate of at least 30% through 2028. And taking that into account, the company's price/earnings-to-growth is a much more reasonable 1.6, well within the fairly valued range of between 1 and 2.
Further, SoFi has attractive opportunities beyond the medium term. The company's expanding pool of services and digital flavor, which make it attractive, especially among younger investors, and allow it to save on overhead costs (savings it can pass onto customers), mean the company's ecosystem should continue growing for a long time.
SoFi could be establishing itself as the bank of the future, and investors who stay the course could be well rewarded down the line.
