Since SOFI was at $23.11 on Nov. 12, I wanted to update my outlook for the stock. I believe this financial technology (fintech) company could continue to rise in value. My new view is that the stock could hit $25 per share. This is based on the company’s outlook, its ongoing earnings and its cash flow.
SOFI stock bottomed out at $13.75 on Aug. 17 and since peaked at $23.29 on Nov. 4. That represents a gain of 69.4% over a period of almost 3 months.
What is driving SOFI stock higher? Its stellar third-quarter earnings came out on Nov. 10, showing that the company’s earnings and cash flow are surging.
SoFi’s Recent Earnings
SoFi’s revenue for Q3 grew 35% year-over-year (YOY) to $272 million, up from $200.8 million last year on a GAAP basis. On a non-GAAP basis, Sofi’s net revenue was up 28% to $277.19 million, slightly higher than the GAAP revenue.
This was substantially higher than the company’s prior guidance of $245 million to $255 million in revenue for the quarter (see page 11 of the letter.)
The reason that is important is that the company’s guidance going forward can be more reliable. For example, SoFi is now projecting higher Q4 revenue.
Its guidance is for $272 million to $282 million in Q4. That represents a gain of 49% to 55% over last year. If its past guidance is any key, it seems likely that SoFi could exceed these numbers.
In addition, the company has now successfully diversified away from student loans. In fact, its shareholder letter indicates that most of its loan originations are personal and home loans. Page seven shows that of the total $3.4 billion in loans originated during Q3, 48.2% were personal loans and 23.3% were home loans.
This allows SOFI to have a more diversified and growing revenue base. In addition, since it generally sells off these loans, SOFI can earn servicing right fees managing the customer relationship for investors.
The Analysts’ Views on SOFI Stock
Right now, the average price target of eight analysts surveyed by Seeking Alpha is $25.07, or 8.5% more than Friday’s price of $23.11. Moreover, six analysts reviewed by Refinitiv, whose data is published on Yahoo! Finance, show their average price target is $25.58, or 10.7% higher.
For 2022, Seeking Alpha indicates the same eight analysts have an average revenue forecast of $1.48 billion. That represents a 48% rise over the average $1 billion revenue estimate for 2021.
This is why SOFI stock has a huge market cap of $18.46 billion. That implies a price-to-sales (P/S) metric of about 12.4x for 2022.
On top of this, these analysts now expect earnings will reach profitability in 2023, and by 2025, SoFi will earn 69 cents per share. This is still a very high price-to-earnings (P/E) multiple, so I think the market is generally valuing the company on a P/S basis. Investors likely believe SoFi’s profits will eventually come, but scaling and leveraging its revenue growth is more important for now.
Where This Leaves SOFI Stock
For the nine months ending Sept. 30, SoFi made adjusted EBITDA of $25.6 million. That represents an adjusted EBITDA margin of 3.66% on its $700 million in revenue so far this year.
However, I project the company could have earnings power of at least a 15% adjusted EBITDA margin by the end of 2022. That would raise its adjusted EBITDA to $222 million (i.e., 15% times $1.48 billion.)
Over time, this would grow exponentially as revenue rises. That is due to its inherent operating leverage ability; as revenue rises, costs do not rise anywhere near as much.
As a result, within several years, I believe that adjusted EBITDA could hit $400 million. On a 50 times multiple, that puts the stock’s value at a minimum of $20 billion, and possibly much higher. This implies an 8.3% gain in SOFI stock to $25 per share.
This is also close to other analysts’ target prices for SOFI stock. Granted, this is not a large increase. However, if the company continues to outperform analysts and its own revenue guidance, the valuation will rise quickly.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.