SoFi Technologies: Expanding Cross-Sell Potential as Growth Catalyst (NASDAQ:SOFI)

investment thesis

My previous bullish thesis on SoFi Technologies stock (NASDAQ:SOFI) has aged extremely well as the stock is up 25% since the end of June, compared to just +3.4% delivered by the broader US market.

The The company continues to demonstrate exceptional growth across all key metrics, including the bottom line. Management seems confident in the company’s prospects and I share that optimism. My valuation analysis suggests that the stock is still substantially undervalued. All in all, I think it’s fair to reiterate a “Strong Buy” rating for SOFI.

Recent developments

SOFI released its latest quarterly earnings on July 30, beating consensus revenue and EPS estimates. Revenue grew 22.1% YoY. Bottom-line performance was also solid, with adjusted EPS expanding from -$0.06 to $0.01 on a year-over-year basis.

The report was positively absorbed by Needham as this prominent Wall Street name reiterated its ‘Buy’ rating with a Price target of $10. Needham’s price target is considerably higher than SOFI’s last close, which adds to my optimism.

Needham’s optimism is understandable, as SOFI continued to demonstrate astounding growth across all vital metrics in Q2 2024. Membership was up 41% year-over-year and products were up 36%. I prefer to be consistent, and SOFI’s cross-selling potential is the major secular reason why this stock caught my eye. The massive expansion of SOFI’s customer base and the products sold to them creates a formidable foundation to capitalize on cross-selling opportunities. I can clearly see management’s efforts to make SOFI a compelling financial services “one-stop shop” for its members, as the number of products expands in both Lending and Financial Services lines of business.

During the earnings call, management emphasized innovation efforts and work on new product manufacturing. This aligns with what management has done so far, and this commitment to improving SOFI’s value proposition is key to continuing to expand the company’s cross-selling potential. Prioritizing innovation seems sound, especially considering that fintech is expected to become a $1.5 trillion industry by 2030.

Management balances between driving innovation/growth and bottom line expansion. This is another positive secular trend for investors. SOFI demonstrates strong EPS momentum despite SOFI’s aggressive growth in outstanding shares. Dilution is inherent in almost any fast-growing young company, but it is most likely temporary, and as SOFI gains financial strength, the pace of dilution is very likely to decelerate. The business model is certainly solid as it demonstrates a consistent correlation between revenue growth and improved profitability.

In conclusion, I think recent developments support my optimistic position. The pace of revenue growth is impressive, fueled by several indicators. I clearly see management’s commitment to maximizing SOFI’s cross-selling potential, which will be a formidable foundation to build sustainable shareholder value. Additionally, management manages to balance growth/innovation with core performance, which is also crucial for long-term investors.

Rating update

The share price has fallen around 9% over the past twelve months, lagging substantially both the financial sector (XLF) and the broader US market. SOFI is also underperforming from a YTD perspective, down 20% YTD.

The valuation ratios look extremely attractive if we look at the P/E ratio going forward after fiscal year 2025. The company broke even not long ago. Therefore, it will be correct to ignore the TTM and forward the P/E ratio for FY 2024. In the table below, we can see that a massive contraction in the P/E ratio is expected due to the amazing EPS growth trajectory forecast by SOPHIE.

Since SOFI is a bank in both substance and form, I also want to emphasize its attractiveness in valuation from a tangible book value (TBV) perspective. According to its most recent balance sheet, SoFi’s total TBV is approaching $4.2 billion.

Based on the guidance presented above, SOFI expects its TBV to increase by approximately one billion by the end of the current fiscal year. That said, TBV will very likely be around $5.2 billion by the end of the year. With its current market cap of $8.5 billion, that means SOFI’s one-year price/TBV is around 1.63. This is considerably lower than the same rate of JPMorgan Chase ( JPM ), the largest US bank

Of course, the SoFi scale is ridiculously low compared to JPM. On the other hand, JPM’s revenue is expected to grow roughly in line with inflation over the next decade. SOFI’s revenue is expected to generate double-digit revenue CAGR over the next ten years. That said, the comparison seems fair to me and indicates substantial undervaluation. As shown above, JPM’s P/E ratio is 2.45. Multiplying SoFi’s year-end TBV of $5.2 billion by a factor of 2.45 gives me the company’s fair market cap at $12.7 billion. This means there is an upside potential of around 49% for the next twelve months.

Some readers may say that I am not fair when I compare SoFi’s valuation to JPM’s. Let me show you another glaring example that is much closer to SOFI. Revolut is a British fintech company that received its national banking license just a month ago, with almost no exposure to Revolut’s US revenue in 2023, and SOFI’s TTM revenue is comparable at around $2.2 billion. According to the latest assessment, Revolut’s capitalization is 45 billion dollars. This is several times higher compared to SOFI, which is another reason to believe that SOFI is substantially undervalued.

Risk update

SOFI is a growth stock and September looks like a risky month to invest in growth stocks. According to the seasonality chart below for the iShares Russell 2000 Growth ETF (IWO), September is by far the weakest month for growth stocks. Moreover, the market’s recent cautious reaction to another underwhelming quarter by Nvidia ( NVDA ) could also be a red flag for bullish stocks. Therefore, SOFI investors could see a pullback in September before the stock returns to its upward trajectory.

As SOFI operates in a booming fintech industry, competition is about to intensify. There are a lot of big fintech companies in the US Although most of their offerings don’t directly overlap with SOFI at this point, most of them are also working to maximize their cross-selling potential. Therefore, there is a substantial risk that much larger players such as PayPal (PYPL) will start competing directly with SOFI sooner or later. Moreover, it is also important to note that SOFI also competes with traditional banks, where giants such as JPM or Bank of America (BAC) dominate.

Conclusion

In conclusion, I think SOFI is still a “Strong Buy”. There is no reason to become less optimistic as the company continues to demonstrate massive growth across all key financial and business metrics. The land and expansion potential is impressive and certainly expanding. The valuation also looks extremely attractive.