Whether it’s a radically new operating model, the right use case for emerging technology, or innovative products or services, technology disruptors are changing the way we do business. That is why SoFi (NASDAQ:SOFI) stock is a prime candidate for your portfolio.
In the last month, shares have shed 14% as retail traders take their profits. The phenomenon should not surprise you. SoFi Technologies went public after merging with investor Chamath Palihapitiya’s blank-check company, Social Capital Hedosophia Holdings Corp. V, in January.
Since that time, the stock has oscillated wildly. As of this writing, shares are down nearly half from their 52-week high. Whenever a SPAC merger settles, a price drop is inevitable because retail investors take their profits and invest elsewhere.
That does not mean it’s a bad stock. Just that value investors are now more in control. And with SOFI stock, that is a good thing.
PayPal (NASDAQ:PYPL) and SIVB Financial (NASDAQ:SIVB) are both mature fintech companies trading at a premium to SoFi, which expects to earn $1 billion in net revenue in 2021. In Anthony Noto, the company has an experienced hand guiding the ship. And Galileo, the banking Application Program Interfaces (API) business Sofi bought last year, is another major catalyst for long-term growth.
What’s not to love?
Judge SOFI Stock on Its Own Merits
SoFi started as an online lender for students and homeowners. It has expanded into payment and investing services, allowing users to trade equities and cryptocurrencies, creating a compelling fintech ecosystem. It functions like an online bank and brokerage, albeit with digital services.
Its extended suite of services includes personal loans, home loans, and even insurance, credit card services, cash management, brokerage services, payments, and financial services APIs for enterprises. All of these offerings in a single app have led to tremendous user growth for the company’s product.
According to its Q1 2021 results, SoFi’s membership jumped 110% to about 2.3 million; adjusted net revenue of $216 million grew 151%, and adjusted EBITDA was $4.1 million, comparing very favorably to negative $66.2 million in the year-ago period. The personal lender expects adjusted net revenue for the year to rise 58% to $980 million, and adjusted EBITDA is forecast to reach $27 million.
The one area where investors might be concerned is the lack of a national bank charter. Rather, SOFI relies almost exclusively on warehouse financing facilities to originate loans and sell them to customers. This involves borrowing from large financial institutions for the purpose of loaning. The process reduces the interest income earned because of the middleman providing cash management facilities. SOFI will be able to earn a higher return on loans and greater interest income by getting a national bank charter.
Galileo Acquisition Is a Game Changer
In the first quarter of 2020, SoFi acquired Galileo, a Salt Lake City, Utah-based software company that connects banks to credit card processors through APIs. In the first quarter of 2021, Galileo added 11 million accounts to reach 70 million total accounts, a year-over-year increase of 129%. The two companies started collaborating in 2020 when SoFi began using Galileo as its payments processor for SoFi Money.
Adding new companies like Galileo can further improve SoFi’s datasets. This will help in better understanding consumer risk profiles through even more transaction data. SoFi can also expand towards providing business loans to enterprises using data that they have about firm performance, adding to the overall growth and interest income.
The acquisition also highlights an effort by SoFi to diversify its product mix and not solely rely on interest income. In a low-interest-rate environment, having a fintech ecosystem that can maximize the value per consumer is crucial. As of 2020, SOFI’s non-interest income makes up 20% of overall net revenue. Although not an insignificant figure, investors will want this number to rise in the forthcoming quarters. And acquisitions such as the Galileo one will greatly help in this regard.
Forward-Looking Investment
There are several things to like about SoFi stock. SOFI’s integrated platform distinguishes it from both traditional banking peers and major fintech competitors. SOFI is horizontally diversified in different aspects of consumer finance. It provides banking services to each of its individuals on a single platform. This will help the company increased the number of customers and the value derived through selling different financial products.
The price correction we saw earlier in the year is not surprising. It has more to do with SPAC dynamics than any inherent flaw in the company’s business model. As it moves forward, their excellent strategic positioning gives me confidence.
On the date of publication, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
