Wall Street isn’t happy with SoFi right now, but investors should be.
There aren’t too many deals on the market today. Tech stocks with massive potential trade at high multiples, and investors have to wonder whether those stocks are worth their current asking prices. At the same time, there are plenty of value stocks trading at low prices but offering lower growth potential.
Smart investors seek out those rare opportunities where high-growth stocks are trading at dirt-cheap valuations. Those companies often come with greater risk as well, but sometimes the payoff is huge.
That’s why it seems more and more curious that SoFi Technologies (SOFI -0.43%) stock keeps dropping as it reports more and more impressive performance. The fintech stock is demonstrating robust growth, trades at a low earnings multiple, and the risk lessens each time it smashes through expectations.
Is the market completely missing the mark here? Let’s see where SoFi might be in one year, and whether or not this is the bargain it appears to be.
Another smashing quarter
SoFi is an all-digital bank targeting college grads and young professionals. It offers a full suite of financial services on its app, including bank accounts, investing tools, loans, and more. It’s banking for modern times, and its easy-to-use services and low fees are attracting hundreds of thousands of new accounts quarterly. This is speeding up its growth and has launched it safely into profitability, and the 2024 first quarter was a dynamite showing.
It added 622,000 new accounts in the 2024 first quarter, 35% more than last year, and revenue increased 37% year over year. It was the second consecutive quarter of positive net income, which totaled $88 million based on generally accepted accounting principles (GAAP) — well above the projected $20 million. Diluted earnings per share were $0.02, which does not include a one-time benefit related to a convertible debt exchange included in net income.
On top of new customers, SoFi’s growth comes from its financial services productivity loop strategy, which leverages the platform’s many services to generate higher engagement throughout the platform. SoFi added nearly 990,000 new products to the platform in the first quarter, or 38% more than last year.
Things could get much better
In a year from now, all of these numbers are likely to be a lot higher. SoFi’s platform is resonating with its core customers and many others. It offers the future of banking, which is all financial services on one mobile app, and more people will likely keep making the switch. While all banks are getting into digital, SoFi has several advantages over the competition.
One is its first-mover’s edge, which gives it a strong brand presence as a digital bank. Even more, since it was created as a digital app meant for laymen, it’s been built from the ground up to be functional and agile, which appeals to young users. Finally, through its roots as a student loan cooperative, it has developed relationships with a core group of upwardly mobile professionals that will grow along with it.
SoFi is branching out of its core lending business, and that diversification has been key to its recent growth. But even the lending business is bouncing back, with two trends in its favor. One is the end of the student loan pause last October, and the other is that even though interest rates are still high, they may have reached a plateau, even if they aren’t coming down as quickly as economists were predicting.
As for the company’s outlook, it’s guiding for adjusted net revenue to increase 15% for the total year of 2024 to about $2.4 billion and net income of about $170 million. These were both raised since the last update.
What’s wrong with Wall Street?
Despite the excellent performance, SoFi stock plunged 10% after the company released the report. Wall Street didn’t like the slowdown in revenue growth projected for the second quarter, which calls for about $560 million, below its expectations of $581 million, or the net income guidance of about $7.5 million, which is below its average projection of $13 million.
If the second quarter is anything like the first quarter, SoFi will blow these projections out of the water. Either way, investors should focus on long-term trends, not short-term performance, and certainly not missed analyst expectations. I wouldn’t say they don’t matter at all; investors should always make decisions with all the information they can find, and bringing in Wall Street’s analysis rounds out the picture. But they definitely don’t come close to providing a full picture.
The other way this analysis impacts investors is that it just created an incredible opportunity for investors to buy SoFi at an attractive valuation of 3 times trailing 12-month sales and 37 times forward 1-year earnings. Investors shouldn’t be discouraged. In a year from now, SoFi should be growing on schedule, and its price stands a good chance of catching up.
