SoFi Technologies‘ (NASDAQ: SOFI) business has consistently grown since going public in 2020. You can’t say the same about its stock price. SoFi stock has trailed the market since its debut, posting a 46% total return compared to 77% for S&P 500 index holders. For years now, the share price has underperformed index funds, which is likely frustrating investors.
The underlying business has grown much quicker. Revenue is up a cumulative 263%, making it one of the fastest-growing companies in public markets since its stock began trading. Does this fast growth and stock price underperformance make SoFi a buy today? Where will it be in five years? It’s time to take a closer look at this financial technology (fintech) disruptor and see whether it belongs in your portfolio today.
SoFi began in 2011 as a student loan marketplace at Stanford, and eventually got its business started in student loan refinancing. Today, it has evolved into an all-in-one mobile application for your personal financial needs.
Banking, investing, lending products, even cryptocurrencies and private market investing — you can find it all on the SoFi app. This pitch, along with SoFi’s aggressive marketing campaigns, has led to steady user growth across SoFi’s various products. It had 9.4 million members in the third quarter, up from just 1 million in Q1 2020.
Five years from now, I expect this growth formula to have led to even more usage and brand awareness. There are more than 100 million households in the U.S. that SoFi can target. This isn’t just for online banking, but for almost any financial service a consumer might need. The growth rate that SoFi puts up will undoubtedly slow (this is a competitive industry, after all) but SoFi clearly has a value proposition that resonates with users. I wouldn’t be surprised if total customers hit 20 million in five years.
A few years ago, the majority of SoFi’s business was in lending. This included student loans but also personal loans and home loans. The company is still operating in this area today, and investors should expect its loan book to grow as long as SoFi keeps gaining customer deposits. Total loans outstanding sat at $25 billion in the third quarter, up from $23 billion in Q2 2024.
Investors were worried about SoFi’s loan performance as an unproven lender that was growing quickly. SoFi has assuaged these concerns, showing credit performance data that indicates its current loans are performing better (meaning fewer borrowers are defaulting) than back in 2017. This is good news and likely why the stock popped after last quarter’s earnings.
However, over the next five years, I predict that SoFi’s business will increasingly shy away from lending. This has already occurred during the past few years. The company’s financial services (credit card swipe revenue, investing brokerage revenue) and technology platform revenue now make up 49% of overall revenue compared to 24% in Q1 2021. Both segments are growing quickly and can help SoFi diversify its operations, making it less susceptible to a lending downturn.
It technology platform, called Galileo, helps third-party financial institutions perform things such as digital account setups and direct deposits. This is high-margin revenue that hit $100 million last quarter, growing 14% year over year. Galileo and the technology services business should help SoFi’s earnings grow during the next five years.
Estimating SoFi’s financial performance is difficult given its various business segments. The lending operation should be valued like a bank, which would use book value and net interest income as key valuation metrics. The other segments such as financial services and the technology platform would be much better valued on revenue and contribution margin.
Let’s try and simplify things to see if SoFi stock is a buy at today’s prices. During the last 12 months, revenue was $2.5 billion. Due to its business momentum in acquiring users and customer deposits, I believe SoFi’s revenue can double during the next five years to $5 billion. The company doesn’t earn much in net income today, but it is likely that bottom-line profit margins will be 10% (if not more) once the business matures in the next five years.
That would bring SoFi’s annual net earnings to $500 million in five years. Compared to its current market cap of $17.7 billion, that would be a price-to-earnings ratio (P/E) of 28 in five years, which is above the current P/E of the S&P 500, now less than 26. Of course, SoFi’s revenue could more than double in five years and the net income margin might be above 10%, but under this scenario, the stock would still trade at a premium earnings multiple five years from now. From my seat, the stock looks a bit overvalued at current levels. I wouldn’t expect shares to be much higher in five years.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
