SoFi: A Hassle-Free Fintech Buy (NASDAQ:SOFI)

SoFi Technologies, Inc. (NASDAQ:SOFI) doesn’t get much love from investors these days, even though fintech is growing, customers are joining at record speed and profits are snowballing.

With this background providing plenty of fuel for fintech growth, SoFi Technologies again raised its 2024 forecast in both key metrics, EBITDA and net income.

I think SoFi Technologies’ membership growth is significant, and given that fintech is now profitable, the profit profile of an investment in SoFi Technologies could be tilted to the upside.

My rating history

In my May article on SoFi Technologies, I assigned a fintech Buy stock rating as SOFI benefited from robust growth in membership and financial services products.

SoFi Technologies once again raised its 2024 forecast for both EBITDA and net income in the second quarter as the company developed some real momentum in membership growth.

I believe SoFi Technologies stock is undervalued and that fintech is a top investment for investors in 2024.

Significant member value

A significant amount of new members flocked to SoFi Technologies in the second quarter, and it’s that kind of momentum that I think investors are underestimating here: In 2Q24, SoFi Technologies’ membership grew by 643,000 after the fintech added 622,000 new members in the previous period. quarter.

The fintech now has a total member base of 8.8 million, which means the fintech has doubled its membership in the last two years. In fact, the company has steadily grown its membership over time, which shows the strength of SoFi Technologies’ banking platform.

SoFi Technologies’ net loan income rose 3% to $340.7 million in the second quarter, but in financial services, net income soared 80% to $176.1 million, mainly due to increased net interest income. However, lending fared better than in the previous quarter, when the fintech saw a decline in quarterly net income.

SoFi Technologies’ SoFi secret is that fintech has become extremely good at bringing new financial services products to its customers. Financial services have been fueling fintech results for a while, and I think it’s a nugget that investors may not fully appreciate.

For example, financial services products grew 39% year-over-year, while lending products grew at a much more moderate 19% year-over-year growth in the second quarter.

Financial services and technology products (Galileo) accounted for 45% of SoFi Technologies’ adjusted net income in Q224, up from just 32% two years ago. SoFi Technologies anticipates this revenue split to grow to 50-50 over a full year.

SoFi Technologies is profitable in terms of EBITDA as well as net income. In 2Q24, the fintech earned $137.9 million in adjusted EBITDA, reflecting an 80% year-over-year increase.

The fintech’s growth is mainly coming from its financial services segment as well as the underlying momentum around product growth. SoFi Technologies has been unprofitable for most of its history, but finally turned the corner in 4Q23.

Thanks to this momentum, SoFi Technologies has raised its outlook for adjusted EBITDA and net income: The fintech now forecasts adjusted net income of $2,425 million to $2,465 million, reflecting growth of 17-19 percent over last year, while Adjusted EBITDA is expected to fall in a range of $605. – $615 million, reflecting a 25% increase over last year. For SoFi Technologies, this was the second consecutive increase in guidance in 2024.

SoFi Technologies is still a steal

The market is currently modeling sales of $2.82 billion by 2025, which implies, given the fintech’s current market cap of $7.5 billion, a leading sales multiple of 2.6x . PayPal Holdings Inc. (PYPL) it’s trading at 2.0x 2024 estimated sales, but PayPal has growth challenges and investors aren’t too fond of the stock either.

If the consensus estimates are correct, SoFi Technologies expects to produce sales growth of 15% next year, compared to an annual growth rate of half that of PayPal (7-8%).

The growth momentum, however, is clearly in SoFi Technologies’ favor, and the fact that the fintech has now doubled its 2024 forecast suggests the company is on track with its financial services-focused growth strategy.

If SoFi Technologies becomes consistently profitable and drives sales growth with its financial services segment, I believe SoFi Technologies could revalue to a 4-5x sales multiple, which leads us to an implied intrinsic value between $11 and $13.

Why the investment case could disappoint

SoFi Technologies is growing fast, but it seems the market has yet to be fully convinced of the fintech growth story.

This may be the case because investors are pooling SoFi Technologies with other banks, rather than with technology companies that have considerable potential for expansion. I think this is a mistake because the company is primarily profiting from growth in financial services and not growth in lending as we would expect from a traditional bank.

I think the risk/reward relationship is generally quite favorable for an investment in SoFi Technologies, and I think the upward trajectory of members is a clear indication that the fintech has implemented a successful business strategy.

My conclusion

SoFi Technologies saw many new members join its personal finance platform in the second quarter as the fintech gained another 643,000 customers.

SoFi Technologies has now doubled its forecast for adjusted EBITDA and net income for 2024, which in my view proves that the company’s growth plans are working.

SoFi Technologies is a “Buy” for me primarily due to undervalued member growth, financial services momentum and strong valuation profile.

Paying only 2.6 times the sales leader for a fintech with considerable sales and EBITDA momentum is a great deal for investors looking to invest in the fintech industry for the long term, in my opinion.