SoFi Technologies (NASDAQ: SOFI) shot to prominence as it lowered the cost of banking through technology. Its focus on bringing mobile banking technology to the masses also gave it extensive investor appeal. Is investing in SOFI a good move in 2022?
What is SoFi Technologies?
SoFi, short for Social Finance, is an American online personal finance company. Its financial products include student loan refinancing, mortgages, personal loans, credit cards, investing, and banking through mobile app and desktop interfaces.
The chance for retail investors to invest in SOFI stock came from a Chamath Palihapitiya-backed SPAC deal. In December 2020, blank-check company Social Capital Hedosophia Corp V merged with the fledgling fintech. The hugely hyped IPO valued SoFi at $8.65bn.
Before going public, SoFi raised money from venture capitalists, including Peter Thiel and SoftBank. Its last private valuation was around $5.7bn.
Since the IPO, the SOFI share price has fluctuated wildly, but today sits comfortably around an $11bn market value.
How has SoFi Technologies performed over the past year?
The SoFi share price is subject to extreme volatility and is down 34% in the past three months.
SoFi does not offer shareholders a dividend. Its price-to-sales ratio (P/S) is 19.9, and price-to-book value is 2.6. It’s not yet profitable, and therefore projected ROE is negative.
Nevertheless, its revenues have been growing. Its Q3 adjusted net revenue of $277m ($215m from lending) beat Q2’s $237m.
During Q3, it also grew its total membership by 96% year-over-year to 2.9 million with the addition of 377,000 new members. Revenue guidance for 2021 comes in at $996m, a considerable jump from $621m in 2020.
Meanwhile, Q3 sales at SoFi’s Galileo technology platform rose 80% year-over-year.
73% of FactSet analysts rate SoFi a buy. According to David Chiaverini at LA’s Wedbush Securities, SoFi is poised to grow at a compounded annual rate (CAGR) of 28% through 2026. He has a price target of $20 on the stock.
Reasons to invest in SoFi Technologies
SoFi stands to benefit from several external events occurring in 2022. The bank charter offers massive growth potential. And given that we’re in an inflationary environment with interest rate hikes increasingly likely, SoFi could see its revenues soar.
Furthermore, the end of federal student loan relief means borrowers must be ready to continue repayment. SoFi is at the ready to offer cut-rate repayment plans.
Galileo helps small-scale fintechs operate with ease. This is a massive addressable market that could help SoFi's revenue growth soar.
SoFi’s financial services segment is gaining traction with its various investing options. Attracting consumers through this avenue can lead them to become borrowers. It is also heavily investing in getting the brand in front of its target audience. This includes a spectrum of tactics, from sponsoring investor newsletters to sponsoring the Superbowl stadium.
Reasons not to invest in SoFi Technologies
If investors stop considering SoFi as the breakthrough fintech and more like a legacy bank, its valuation will be wildly out of whack with traditional banks. For instance, JPMorgan Chase is a bank with a $440bn market cap and P/E under 10. Bank of America is worth $380bn with a P/E of 14, and Wells Fargo is worth $221bn with a P/E of 11. Each offers shareholders a dividend and has assets under management in the trillions.
Becoming a bank will bring regulatory restrictions that reduce its ability to adapt. Alternative finance is a competitive space where challenger banks have already struggled to perform. Many legacy banks have launched their own fintech offerings to compete with the newcomers with mixed results.
Although its marketing efforts are to be admired, they will come at a cost and whether this pays off remains to be seen.
While SoFi’s revenues from loans have been very impressive, this is also a shaky territory to be involved in.
Desperate times call for desperate measures, and many of those looking to refinance their student loans may not be flush enough to keep up payments. This could lead to a default. Indeed, if COVID continues to exacerbate job losses while interest rates rise, the rate of default could rise.
Some camps are crying out for student loans to be abolished. While this is a highly polarising political topic, if it was to pass, that would be a big problem for SoFi.
Should you add SoFi Technologies stock to your portfolio in 2022?
While finance can reap big rewards, it’s also a costly business to get started in. SoFi’s balance sheet shouldered around $2bn worth of debt at the end of Q3. Going ahead with the bank charter means adding an immediate $750m to this. If its vision plays out, the company could soon demolish its debt with rapid, sustainable growth. But there are many risks to be aware of.
For instance, SoFi’s investment arm could be seen as a direct competitor to Robinhood (NASDAQ: HOOD). And Robinhood has been subject to considerable negative press and suppressed share price (down 60% since IPO). Its participation in payment for order flow is of particular contention and something SoFi may also be criticized for.
Investing in SoFi today remains a speculative play. While it has a lot of exciting growth prospects achieving these could be costly.
Nevertheless, the transition to digital banking is still relatively new and therefore, a large market is up for grabs. SoFi has already established itself in the space and has shown impressive growth thus far.
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