Can SoFi stock make you a millionaire? Let's answer that for you today... because I know you've been dying to know :) The stock has been on a wild ride since its SPAC IPO... unsurprisingly. It's sitting 30% off its ATH, but it's been gaining some momentum lately... up 20% in the past week alone!
The stock sold off after Q2 earnings – which, in hindsight, was a great buying opportunity! I figure it was (when it happened), but didn't do my full due diligence on it until now... But, remember, we're still 30% off the ATH and the fundamentals haven't changed since. There could still be some time.
Revenue & Business Model
Their revenues are broken into three segments: Lending, Technology Platform, and Financial Services.
Up until this point, their business has been mostly in Lending – namely student loans. But, that has taken a backseat since the temporary federal student loan forbearance and other student loan relief were authorized with The Cares Act of March 2020, in response to COVID-19. Recently President Biden has extended federal student loan payments through January 31, 2022. Naturally, students don't have a need to refinance their loans... thus the drop in this business for SoFi. But, I think this might have been the best thing to happen for them, as they demonstrated how quickly they can adapt. Loan origination for personal and home loans increased to make up for that difference. Premium members of the Hawk Letter can see this on our Google Sheet analysis, linked below.
Aside from the Lending business, SoFi's Technology platform and Financial Services are growing much faster – as they're earlier in the lifecycle. Technology includes their investments in Galileo and Apex Clearing, which are backend solutions for fintech companies. This segment not only provides SoFi with fast-growing, profitable revenue streams... they also help SoFi with greater margins, especially in the long-term with their goal of getting a banking charter (more on that later). Anthony Noto describes Galileo the "AWS of fintech".
The Financial Services segment includes savings, spending, investment accounts, as well as various debit and credit card services. This, although not yet profitable, is their fastest growing category. This is also the category with the biggest potential upside for SoFi. Scaling the financial service segment successfully, would mean SoFi would be the market leader as the first "digital-first" (mobile) bank. Sure there could be competition, but SoFi is way ahead of the rest.
Of course, in order for the "flywheel" effect that SoFi is looking to accomplish, it needs to provide a good experience along with its products. When we take a look at their online reviews, that seems to be the case. Naturally, not all the reviews are positive; but they seem to be on the right end of the spectrum. There are many satisfied and happy users of SoFi – unlike some of its "competitors" cough cough Robinhood.
In order to actually quantify this, a good metric would be took look at their average revenue per user (ARPU) growth rate – which we'll dig into in our valuation.
The SoFi Member Advisory Board and SoFi Inner Circle further ensures the community and its users are heard. These special members are also part of a private online community to be the first to hear about company news, new products, and member benefits – including those at SoFi stadium...
SoFi recently bought the naming rights to the new SoFi Stadium in Los Angeles, California, which would be the home for the LA Rams, LA Chargers, and will host many other events and concerts. including the Super Bowl next year! This will build brand equity in a huge way.
SoFi members are also given express entrance to skip long lines outside the stadium, 25% cashback on (overpriced) food and merch, complimentary bag check, and access to the private SoFi member lounge.
SoFi already applied for and got conditional approval for a national banking charger. However, they recently announced their acqusition Golden Pacific Bancorp (“GPB”) which should fast-track that approval as soon as this year. This will be a huge catalyst for its fundamentals... and its stock price.
A national bank charter will allow SoFi to further its lending capabilities by allowing loans made with member deposits instead of capital borrowed from third-party banks. They'll be able to hold more loans on their books, and have no limits to their number of mortgages. They'll also be able to determine their own interest rates, instead of depending on a sweep partner. SoFi would then also become Galileo's sponsoring bank, and if Galileo's partners want to offer credit cards, SoFi would be able to provide this service. The synergies from vertical integration can't be underestimated here!
From a valuation perspective, which you can get the full details on the YouTube video (above) or the working papers (below, for premium members), SoFi has room to run in my opinion.
Although they've slowed student loans, the personal loans and mortgages (which will only increase) are more than making up for the loss. Over time, as management anticipates, Technology and Financial Services will make up bigger portions of the business.
I forecasted a total CAGR of revenues of 45% from 2021 to 2024, and EPS of $0.40. At a 65 P/E multiple, this means a price target of $26. I believe the stock should easily be there, which is a 54% upside from where we are today.
- Competition - The biggest risk, in my opinion, is competition from other virtual fintech applications and traditional banks. Yes, they can enter the arena that SoFi is creating... but SoFi is leading the way and should enjoy a significant first-movers advantage. However, these other apps like Robinhood have almost 10x the userbase, so it is something to consider.
- Regulatory Risk - There is a risk that SoFi doesn't get its banking charter approved, or is exposed to other regulatory risks that we are not aware of. The chances of them running into something that materially impacts the business are pretty slim, however. Nonetheless, worth noting.
- Execution Risk - There is a lot of bullish sentiment around this stock and company. The bar is set pretty high, but not as high as some other fintech players like Upstart. The team at Sofi, and Anthony Noto as CEO does mitigate this risk.
My Concluding Thoughts
I believe I'm being conservative here, but there is a lot of risk and subjective assumptions which will only be more clear with time. But, the longer you wait, the less the upside. However, that doesn't mean you should buy right now.
I believe the perfect entry point is in the $14-15 range, where there is clear support and strong hands coming into buy. At current prices of $17 I would nibble in and get some exposure, but be ready to buy at bigger amounts in that range. It makes sense technically and fundamentally.
But of course, this is all subjective... and my opinion only :)
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