A little after Sofi Technologies‘ (SOFI 6.43%) stock market debut in 2021, its share price has more than doubled. Investors reacted to strong results from the fintech company and its rapidly growing consumer banking business.
Over the past two years, its performance has been nothing short of spectacular, but you wouldn’t know that by looking at its stock chart. Its shares are about 74% below the high water mark they reached last fall.
SoFi’s stock price may have gotten a bit ahead of itself last year, but the company’s business is stronger than ever. Here’s why it’s a high-growth stock you can buy and hold with confidence.
Why SoFi Stock Was Beaten
SoFi got its start ten years ago by becoming the first company to refinance federal and private student loans. Naturally, the ongoing pause in student loan payments has put a damper on this activity, and it’s unclear how long this will continue. In June, Education Secretary Miguel Cardona told a Senate subcommittee that President Biden may further extend this repayment moratorium after the current extension period expires at the end of August.
Before the pandemic, the company was refinancing about $8 billion in student loans a year. The possibility of Biden offering significant debt relief to borrowers with federal student loans undoubtedly gives many of them good reason to avoid taking those loans private and refinancing them.
The market has also punished SoFi because the company is still in the high growth, low profitability phase of its existence and interest rates are rising. And as interest rates rise, the present value of its long-term cash flows declines significantly.
Why SoFi is a screaming buy now
A diverse collection of rapidly growing revenue streams make SoFi one of the best banking stocks you can buy right now. These days, he runs a full consumer bank through a single smartphone app. By the end of March, it had 3.9 million customers, who used an average of about 1.5 of its products each.
Last February, SoFi became a full-fledged bank with an approved banking charter by acquiring Golden Pacific Bancorp. Now it can fund its own loans from customers’ deposits in checking and savings accounts, which currently offer depositors interest rates of 1.5% per annum.
A bank charter is not the only way for this company to ensure long-term profitability. SoFi also owns and operates Galileo, the company behind the fintech industry’s most valuable application programming interface (API). When new online financial institutions such as Robin Hood Where David want to open accounts, issue payment cards, or perform just about any other digital banking service, the Galileo API is what they use.
Galileo’s API is also a hit with enterprise customers that operate outside of the financial industry but still want to offer store-specific payment cards to their customers. By the end of March, SoFi’s technology platform was activating 110 million customer accounts, up 58% year-over-year.
This year, SoFi acquired Technysis, a cloud-based banking platform that online banks use to manage loans, deposits and other essential functions. By combining Galileo with Technisys, SoFi has become the most vertically integrated financial technology company. This will give it the opportunity to increase its profit margins in ways that its competitors can only dream of.
Another internal advantage
SoFi’s internal technology stack also includes a powerful risk management platform. Instead of paying Just Isaac for a three-digit FICO score, SoFi assesses potential borrowers based on its own algorithms.
Its platform assesses an individual’s credit risk using many more data points than a FICO score measures. And with an approach similar to Reached‘s, SoFi relies on artificial intelligence to improve its risk management chops. It’s apparently working: In the first quarter, delinquencies on fintech personal loans were at an all-time high.
Unlike Upstart, SoFi gets a full view as potential new members move from application to income verification and approval. With all the data in hand, the company continues to refine the process. Its relatively painless loan application process has led to the explosive growth of its memberships and the up-selling of several products.
Despite growing by leaps and bounds, Upstart is already breaking even on a non-GAAP basis. In fact, management expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be between $100 million and $105 million this year.
A more than fair price
You might expect shares of a bank that’s rising as fast as SoFi to trade at a premium, but that’s not the case. The stock is trading at around 1.06 times its book value. This corresponds to the valuation of Bank of America and significantly lower than JPMorgan Chase.
There is no guarantee that SoFi will become a top US bank, but it is moving rapidly in that direction. Investors who buy the stock at its current reverse price have an incredible chance of outperforming the market.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Cory Renauer holds positions at SoFi Technologies, Inc. and Upstart Holdings, Inc. The Motley Fool holds positions and recommends Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.