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Buy SoFi, the Real Deal of Fintech Companies

When investors think of winning fintech companies, they will first think of PayPal (NASDAQ:PYPL) and Square (NYSE:SQ). Now that their valuations are above the $300 billion and $100 billion, respectively, investors must seek up and coming prospects. SoFi Technologies (NASDAQ:SOFI) stock looks like a promising choice.

the Social Finance (SoFi stock) logo is displayed on a smartphone.
Source: rafapress / Shutterstock.com

After the stock fell sharply post-earnings, SOFI stock could reward early fintech investors. SoFi needs to through its student loan financing losses for the second half of the year first.

Why SOFI Stock Fell

SoFi will lose around $40 million in student loan financing. The government extended a moratorium on student loan payments. Instead of expiring on Sept. 30, the government extended it into 2022. In the second quarter, SoFi posted adjusted net revenue of $237 million. This is despite its student loan refinancing business operating at below 50% of pre-Covid levels.

Chief Financial Officer Chris Lapointe said that the company faced significant headwinds in the student loans business. Its $859 million in origination volume was less than half of pre-CARES levels. Without a rebound set for next month, investors dumped SoFi shares.

SoFi will shift its focus on the momentum from its other businesses instead. For example, SoFi Money is growing in the triple-digit percentage. It will leverage its existing user base by upselling its recently launched SoFi credit card. To leverage its distribution enterprise channel, SoFi At Work is a dashboard that will help users manage their education, financial solution needs, and plan their contributions to reach goals.

SoFi’s Galileo technology platform differentiates this fintech from the competition. For example, it saw 190% growth year over year in the partner accounts. It added 22 new partners on Galileo so far in 2021. This is on top of the 41 new partners it added last year. SoFi is positioned to capture the sector’s transition from physical payments to digital payments.

Outlook

SoFi forecasts revenue growing from $245 million to $255 million in the next quarter. Adjusted EBITDA will be between a loss of $7 million to a gain of $3 million. For the full year, SoFi re-affirmed its adjusted net revenue guidance of $980 million. Adjusted EBITDA will be $27 million.

SoFi has two key trends in its 2021 guidance. First, annual growth is rebounding back to 2019 levels (per slide 14). Second, the adjusted EBITDA margin will swing from -94% in 2018 to a positive 3% this year. This suggests that next year, earnings will continue in positive territory.

Price Target

Wall Street does not offer much coverage on SoFi. This is the downside of taking a SPAC route over an initial public offering. SoFi avoided paying fees to bankers. It leaves few incentives for analysts to post an article on the stock. The average analyst price target is $26.50, according to Tipranks.

In a bearish scenario, investors may use this price-earnings ratio multiples model to come up with a fair value on SoFi shares. This model benchmarks P/E to estimate equity value.

The fair value is $13.68.

Readers may compare SoFi to cryptocurrency exchanges and financial institutions. This is relevant because the company supports crypto trading. Its bank services are comparable to traditional banks except it offers them online. To change the benchmark companies, click on “Benchmark Editor.”

Risks

SoFi has many financial services offerings demonstrating strong, initial growth. Momentum may slow if the company does not add more customers each quarter. Conversely, SoFi’s all-in-one platform is an attractive and convenient offering. The double-digit percentage growth in product sales since 2019 shows no sign of slowing down. On slide 7, SoFi posted 14% year-over-year growth for lending products. Financial services products growth was 243%, another triple-digit percentage growth since the fourth quarter of 2019.

Your Takeaway

SoFi is an all-in-one fintech firm whose Galileo platform is robust. It is adding loans and financial products that customers need. This will increase customer satisfaction and attract new customers. Investors should expect the company to continue posting exceptionally strong client growth. Profits and revenue growth will follow in the next few years.

In the short term, expect bumpy quarterly results. The student loan headwind is temporary. SoFi is already making up the difference by increasing its efforts on the fast-growing financial services.

Consider SOFI stock at current levels and an initial position. The stock may underperform due to the latest quarterly results. This gives investors a better entry price.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


Article printed from InvestorPlace Media, https://investorplace.com/2021/08/buy-sofi-the-real-deal-of-fintech-companies/.

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