SoFi (NASDAQ:SOFI) stock has been among the most-researched stocks recently, and that’s mostly due to the fact that it may be at an inflection point. But first, let’s roll back the clock and see how we got here in the first place.
The company went public via a SPAC (special purpose acquisition company) merger, becoming one of the biggest blockbuster stocks of 2021. The post-COVID fintech boom propelled the stock to new heights as investors piled in. However, the magic soon wore off as rising rates and economic uncertainty took hold in 2022. SOFI stock tumbled over 80%, trading near $6 (plus or minus $2) per share for well over a year now.
Naturally, such a dramatic rise and fall was bound to create opposing camps of bulls and bears. The debate has only been heating up recently as the business has been doing quite well.
Many investors say the stock is overvalued, and the company’s cash burn is unsustainable. Meanwhile, others argue that SoFi’s impressive growth warrants an even higher premium. Let’s analyze both sides of the argument, and try to find the right way forward.
SOFI Stock: Taking a Closer Look at Both Sides of the Argument
SoFi has performed well in recent earnings reports, beating estimates by 3% on its top line and 65% on non-GAAP earnings per share. On the other hand, SOFI stock also trades at quite a hefty premium, at 3-times sales.
The company’s losses are significant, but are starting to come down on a trailing basis. Thus, the two biggest bearish factors to consider about SoFi is the fact that it has a high price-to-sales ratio and it has a relatively high debt level of $6.4 billion against $2.9 billion of cash.
However, I do not see anything significant to warrant a selloff for SOFI stock right now. If anything, the stock looks undervalued, considering the fact that analysts estimate it to turn profitable next year and build on those profits rapidly.
The Path Ahead for SOFI Stock
If we look at 2028 earnings, SoFi’s forward price-to-earnings ratio drops to 7-times, with the company’s expected earnings per share coming in at almost at $1. This can happen even faster if SoFi continues to beat earnings guidance.
Another way I can see a massive amount of profit growth is if interest rates go down faster than expected. Such a scenario would free up much-needed cash from debt repayments and boost SOFI stock significantly.
On the revenue front, the company’s current market capitalization will basically match the company’s expected revenues from 2030, which may seem like a long time out, but is just a little over six years away. If SoFi continues to beat estimates, this multiple could come in much faster.
Another tailwind that we are looking at is the renewed confidence in banks. While the banking sector went through a mini-crisis earlier in the year, a liquidity injection by the Federal Reserve prevented a domino effect, and confidence in the banking industry is starting to rebound.
Once the industry returns to normal, we could see many more banks comfortable with the idea of partnering up with SoFi. Thus, this makes me believe that it is not “Fool’s Gold,” but is it a Hidden Gem?
The Verdict on SOFI Stock
Let’s look at SoFi’s upside potential. If we look at the consensus Wall Street upside estimate, it sits at 34% over the next year, whereas there are two sell ratings that see this stock declining to as low as $3 per share. I believe the latter is unlikely, considering the future growth potential with this company. I believe SOFI stock can cross $10 in one year’s time, and be above $20 in around five years. Of course, this depends on SoFi continuing to execute well. But overall, the company’s long-term outlook remains bright.
My take is that SOFI stock is poised for solid returns ahead. The company’s growth story remains intact, and current headwinds are temporary. Therefore, investors should see this as an opportunity to grab shares at a discount rather than a warning signal to stay away.
SOFI stock may not be a hidden gem, but it certainly isn’t fool’s gold either. Naturally, there are risks to consider as well. An economic slowdown can hit growth rates, and competitive threats are rising, too. However, its solid positioning in key lending and banking verticals should help the company to overcome these challenges.
On the date of publication, Omor Ibne Ehsan 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.