While the U.S. stock markets set new record highs to close out the first half of 2024, with both the S&P 500 Index ($SPX) and the Nasdaq Composite ($NASX) up by double digits, some stocks have sagged. This includes SoFi (SOFI), which has lost over a third of its market cap, and is trading near its 52-week lows.
Does it make sense to buy the dip in this beaten-down growth stock, and can the shares rebound in the second half of 2024? We’ll discuss in this article.
SoFi Is an Exciting Growth Story
To begin with, SoFi looks like an exciting growth story. The company’s revenues have increased by over 25% YoY for 12 consecutive quarters. Its member base has also been rising steadily, and grew 44% YoY to 8.1 million at the end of Q1.
For context, the company’s member count was a mere 1.08 million at the end of Q1 2020. In other words, the company’s member count has risen by almost 8x in 4 years, which is no small feat.
While a lot of growth companies are struggling with profitability - and some former growth names, like Zoom Video Communications (ZM) and PayPal (PYPL), now resemble deep-value stocks more than growth companies - SoFi actually brings profitable growth to the table.
SoFi Sees 2024 as a Transition Year
SoFi sees 2024 as a “transitional year.” So far, the company’s growth has been led by its lending business, but it is now focusing on the Tech Platform and Financial Services segments, and expects these two segments to account for nearly half of its 2024 revenues, up from 38% in 2023.
Anticipating challenging macros, SoFi has slowed lending, and expects its 2024 lending revenues to be between 92%-95% of 2023 levels. The company has the bandwidth to increase lending if conditions become conducive, as its capital ratios are well above the minimum regulatory requirements.
SoFi is also focusing on growing its book value – a key metric for financial services companies – and expects its tangible book value to rise by between $500 million and $1 billion in 2024. It raised the guidance during the Q1 earnings call, and the top end of the updated guidance is double the previous forecast.
SoFi Stock Forecast
Brokerages are not too bullish on SoFi, and of the 18 analysts covering the stock, only 4 rate it as a “Strong Buy,” and 1 as a “Moderate Buy.” Three analysts rate the stock as a “Strong Sell,” while the remaining 10 say it's a “Hold.”
SoFi's mean target price of $9.07, however, is 37.2% higher than current prices. The stock’s Street-low and Street-high target prices are $4 and $12, respectively.
SoFi’s Long-Term Outlook Looks Bullish
SoFi sees home loan as a major opportunity, and during the Mizuho Technology Conference earlier this month, its CFO Chris Lapointe pointed out that the company’s market share there is less than 0.1%. Also, less than 1% of SoFi members have their mortgage with the company.
Cross-selling has always been a key USP for SoFi, and Lapointe said that the company can sell many of its members with home loan products without spending much on marketing.
He also talked about the opportunity in the student loan refinancing business. Notably, SoFi’s student loan refinancing business has sagged amid the uncertainty over loan waivers. However, the company believes that once the dust settles down following the November presidential elections, and interest rates eventually fall, its student loan portfolio will also see traction.
SoFi expects its revenue growth to stay strong in the coming years, and forecasts that its revenues will grow at a CAGR of 20%-25% between 2023 and 2026 It expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin to rise to 30% in 2026, while forecasting a GAAP net income margin of 20%.
The fintech giant expects its GAAP EPS to range between $0.55-$0.80 in 2026. It further forecasts GAAP EPS to rise between 20%-25% post-2026, as well. At the midpoint of the guidance, we get a 2026 price-to-earnings (PE) multiple of just under 10x, which looks attractive.
SoFi's Valuations Looks Reasonable
Looking at the current valuations, SoFi trades at a next 12 months PE multiple of 63x. While it might seem high in isolation, it should be seen in the light of earnings growth, which analysts predict will rise 180% and 212%, respectively, in 2024 and 2025.
I believe SoFi has gotten a lot more beat-down than is warranted, as markets seem apprehensive about its lending portfolio - and specifically, the expected deterioration in credit quality amid the macroeconomic slowdown and higher interest rates.
However, SoFi has a reasonably good borrower profile, as the weighted average income of its personal loan borrowers is $169,000, while their weighted average FICO score is 746. Similarly, the weighted average income and weighted average FICO score of student loan borrowers were $146,000 and 768, respectively, at the end of Q1.
Overall, while SoFi still needs to deliver on the ambitious long-term guidance that it has provided, I believe it is one stock that could rally in the back half of the year as markets take note of its strong growth prospects and reasonable valuations.
On the date of publication, Mohit Oberoi had a position in: SOFI , PYPL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
