SoFi Technologies (SOFI 3.14%) is on a roll. The stock recently soared to $10 per share, its highest price since early 2022. It’s progress, but the stock is still down about 60% from its all-time high, set during the market bubble in 2021. SoFi is a digital bank, but it’s not exactly a banking stock. (Well, it’s not a traditional bank stock.)
So, just what is SoFi? It could be an industry disruptor with traditional banking features and the added upside of a technology company.
Here are five reasons investors should consider buying SoFi Technologies and tucking it away for the foreseeable future.
1. It’s wildly popular among consumers
On the surface, SoFi Technologies is a digital bank. It offers banking services, loans, and financial products through its website and smartphone app. Unlike many longstanding banks, SoFi doesn’t have any physical branches. It’s a business model born in the digital age. More importantly, SoFi has become quite popular. The company’s customer base has grown from 1.4 million at the start of 2020 to nearly 8.8 million today.
SoFi’s customer count grew 41% year over year in the second quarter, so this trend still has plenty of momentum. SoFi has become especially popular with young, high-earning adults. This is one of the most valuable customer segments in the financial sector, because they will drive the economy over the coming decades.
2. More than a bank
Behind the curtain, SoFi has financial technology in its DNA. In 2020, it acquired Galileo, a fintech company that provides payment processing, card issuing, and embedded finance services to over 100 companies, including H&R Block, Toast, MoneyLion, and others, across 16 countries. Collectively, Galileo’s customers add up to 158 million accounts.
SoFi’s technology platform segment (Galileo) grew its contribution profit by 24% last year, representing about 10% of the company’s total in 2023. Additionally, Galileo accounts have quintupled since the first quarter of 2020. Over time, Galileo could become a more significant contributor to SoFi’s business and expose investors to broader growth across the fintech industry.
3. Student loan upside
SoFi started in the student loan business and built a reputation in refinancing. In 2019, SoFi originated $6.7 billion in loans. However, a federal student loan freeze for most of the past four years and higher interest rates since 2022 have effectively cratered demand for refinancing. SoFi’s student loan originations were just $2.6 billion in 2023, despite it adding millions of customers since 2019.
It looks like the worst is past. The federal freeze is virtually over, and interest rates have seemingly peaked. Meanwhile, analysts estimate that the private student loan market could grow by 10% annually through the early 2030s. SoFi’s student loan business could uncoil like a spring and boost growth over the coming years.
4. SoFi could lean into fee-based revenue
SoFi may not operate quite like a traditional bank over the long term. Traditional banks hold loans on their balance sheets and collect the interest. The risk of default affects how the market values bank stocks compared to most other businesses. Galileo already represents a non-lending component of SoFi’s business, but things got more interesting recently.
Just days ago, SoFi announced an agreement to expand its personal lending business with a $2 billion funding agreement with Fortress Investment Group. Simply put, SoFi will underwrite personal loans but then offload them. SoFi will miss out on the interest income, but it will reduce its balance sheet risk. CEO Anthony Noto commented in the press release, noting an intention to grow SoFi’s fee-based revenue. Holding fewer loans on its books could affect how the market values SoFi stock.
5. Earnings growth is set for lift-off
I often use book value to evaluate bank stocks, but Galileo and a potentially less lending-dependent business model make earnings a viable way to value SoFi stock. SoFi reported a GAAP profit for the third consecutive quarter in Q2 2024. The company is right at that sweet spot where operating leverage (when revenue grows faster than expenses) causes high-speed earnings growth.
Analysts estimate that SoFi will grow earnings by an average of 51% annually for the next three to five years. Given SoFi’s popularity and growth opportunities, I wouldn’t be surprised to see the company enjoy strong earnings growth for the foreseeable future. The stock looks like a candidate to perform well for investors as those earnings compound for years to come.
