SoFi Technologies (NASDAQ:SOFI) can’t catch a break. After the fintech doubled in 2023, SOFI stock lost a third of its value so far in 2024. And that’s despite posting fairly decent earnings in the first and second quarters.
There are headwinds as it changed course to take a more conservative approach to its balance sheet this year, but long-term investors should appreciate that. There is significant risk if the economy spirals into a recession, yet SoFi Technologies is improving its financial position.
It is focusing more on secured loans backed by collateral and less on unsecured personal loans. While that may limit its margin expansion to a degree, it reduces some of the risk of a downturn.
As a result, SoFi stock is better situated for long-term growth that could see its stock price enjoy significant appreciation.
Solid Results and Growing Profitability
Second-quarter results were mixed but overall favorable to SoFi’s bottom line. Revenue jumped 22% from the year-ago period to a record $599 million while its net income of $17 million was a big reversal from last year’s $48 million loss. It marks the fintech stock’s third consecutive quarter of GAAP profitability.
Importantly, member growth surged 44% to nearly 8.8 million. That is key because SoFi needs to create a critical mass of members using its services before the competition moves in.
Currently, SoFi Technologies is the only digitally native fintech offering a full suite of financial products. While it does face growing competition from Affirm, Block, PayPal and even Robinhood Markets, none offers the complement of services of SoFi.
Yet SoFi has shown just how quickly such financial products can be brought to market. With 12.8 million lending products on the market,
SoFi has a broad selection of options for members to choose from. Although it is continually innovating, should any of its rivals enter the market in the same way, its competitive advantages could quickly evaporate.
Transitioning to a Firm Financial Footing
Net interest income still powers SoFi’s financials. NII rose 42% year-over-year as loan growth was up sharply. Net interest margin grew by 90 basis points to 5.83% due to strong retail deposit growth.
Deposits now account for 88% of total funding, up from 78% last year. But that means all the easy money has been made for SoFi.
Especially because SoFi stock is now focusing more on secured lending, further NIM expansion will be more difficult to achieve as secured loans sport lower yields than unsecured personal loans. Total loan values at the end of the second quarter stood at $23.1 billion, up 5% sequentially.
It has been de-emphasizing personal loan growth and more than doubled its loan sales to almost $1.6 billion. This moves SoFi Technologies onto a much sounder financial footing.
With the balance sheet not expanding so rapidly as it did previously, it makes for a better company. The down side is the fintech will likely experience slower growth going forward.
SoFi Stock: A High-Risk, High-Reward Fintech
SoFi stock trades at 26 times expected earnings and less than 2.1x sales. Wall Street forecasts earnings this year of 10 cents per share, a significant improvement over the 36 cent loss it possessed in 2023. By 2025, however, profits should expand materially – to 26 cents per share.
Revenue is also forecast to grow 18% this year and 15% next year, with 15% long-term growth factored in. Earnings growth should come in at 51% over the next five years, meaning SoFi stock could double in value over the next year.
SoFi Technologies remains a high-risk stock if the economy deteriorates. Yet there is a high reward for adventurous investors with the patience to wait for the investment thesis to play out.
On the date of publication, Rich Duprey did not hold (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.
