Shares of SoFi Technologies (SOFI) have risen about 85% year-to-date in 2023, easily outperforming the S&P 500 Index ($SPX)(SPY). Currently valued at a market cap of $7.85 billion, shares of the financial services company are still down 66% from all-time highs.
Let’s see how high SoFi stock can climb in the next 12 months and whether it makes sense to buy it at the current valuation.
An Overview Of SoFi Technologies
SoFi is a technology-based financial services company offering personal loans, home loans, student loans, and credit cards. It also provides technology products and solutions. In 2022, it became a bank holding company through a merger and began operating SoFi Bank offering Checking and Savings accounts.
Despite a weak macro environment and the continued extension of pause on student loan refinancing by the Biden administration last year, SoFi continued to deliver solid financial performance led by member and product growth and cross-selling opportunities.
SoFi achieved record revenues of $1.6 billion in 2022, representing a growth of 60% year-over-year.
Momentum Carries Over into 2023
The momentum in SoFi’s business has sustained in 2023, with the company delivering record adjusted net revenue of $460 million in Q1 (ended in March), up 43% year-over-year. SoFi added 433,000 new members in Q1 of 2023 (up 46% year-over-year), bringing total members to nearly 5.7 million. At the same time, it added 660,000 new products, ending the quarter with 8.6 million total products.
What stood out is the stellar growth in its deposits despite the recent banking crisis and continued strength in the personal loan category.
SoFi’s deposits grew by $2.7 billion quarter-over-quarter and exceeded $10 billion in total deposits. Furthermore, 90% of its consumer deposits came from sticky direct deposit members. Meanwhile, 97% of its deposits are insured.
The high-quality deposit base is essential to SoFi’s growth as it helps the company to benefit from a lower cost of funding for its loans. Further, it allows the financial services company to capture an additional net interest margin.
While SoFi’s deposits grew, the personal loans business benefitted from record originations of nearly $3 billion. The segment continues to grow despite SoFi’s stringent credit standards and rate increases.
Factors Supporting SoFi Stock
SoFi has multiple catalysts, which suggests that it could continue to see strong growth in the coming quarters. Its strong members and products growth, even with a decreasing marketing spend, indicate that SoFi could deliver strong top-line growth in the coming quarters and is on track to achieve profitability soon.
It has expanded its personal loan business without sacrificing credit standards, which is positive. Thanks to its focus on quality, SoFi’s credit performance remains strong, with on-balance sheet delinquency rates and charge-off rates remaining lower than the pre-pandemic levels.
SoFi is also likely to benefit from the increase in student loan originations. Also, home loan originations could accelerate, reflecting benefits from the acquisition of Wyndham Capital.
Besides higher loan originations, SoFi is expected to gain from the diversification of its funding sources, with an increased amount of loans being funded by its high-quality deposits. This drives cost savings.
Overall, SoFi’s diversified revenue streams, strong balance sheet with access to a lower cost of capital, growing lending capacity, and focus on profitability bode well for growth.
Given the strength in its business, the company increased its 2023 revenue guidance to a range of $1.955 billion to $2.02 billion from $1.925 billion to $2 billion. Moreover, it expects 2023 adjusted EBITDA to be between $268 million to $288 million, up from its previous guidance of $260 million to $280 million. In addition, the company is on track to achieve GAAP net income profitability by the end of 2023.
Positives Appear to be Priced in SoFi Stock
SoFi is likely to carry forward the momentum in business in the coming quarters. Further, the recent ruling by the Supreme Court striking down President Biden's student loan forgiveness plan is a positive development for the company as it will further support loan refinancing volumes.
However, given the recent run, the positives appear to be priced in the stock. This is due to high-interest rates, the environment for home sales and refinancing remains tough. Moreover, student loan refinancing volumes will likely increase, but the higher interest rates could lead to lower monetization. In addition, management expects the volumes to stay below the pre-COVID levels.
The Final Takeaway
SoFi's diversified revenue streams, growing customer base, strength in the interest income, high-quality loan originations, and growing brand awareness augur well for long-term growth.
However, I believe investors should show patience and wait for a better entry point in the stock. Given the recent rally, SoFi stock trades at price-to-sales and price-to-book multiples of 5.21 and 1.57, implying that its risk-reward appears to be reasonably balanced near the current levels. Further, the macroeconomic uncertainty and its impact on loan origination volumes remain a concern.
Out of the 45 analysts covering SoFi stock, 4 have a “strong buy” recommendation, 8 analysts recommend a “Hold,” and two maintain a “Strong sell” recommendation. The average price target for SoFi stock is $7.92, which is lower than its current trading price of $8.34.
On the date of publication, Sneha Nahata did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
