Online bank and personal finance specialist SoFi Technologies (SOFI -0.14%) managed a smashing initial public offering (IPO) at the height of the previous bull market, benefiting from a moment in time when investors piled money into any new stock that looked exciting. The stock gained more than 140% within weeks of hitting the markets in June 2021. Then the bear market took over and SoFi's stock tanked in 2022. Right now it trades about 65% off its highs.
SoFi is gaining momentum again in 2023 as investors see opportunities in the bargain bin, and the stock is up 96% so far this year. Where can SoFi's stock go from here? Hint: a lot higher. Let's take a look at SoFi's potential over the next five years.
Diversification put SoFi back in growth mode
I'll admit, I wasn't a fan of SoFi until recently. I put it in the box of exciting, highly valued, unprofitable growth stocks, which sets off alarm bells for me. I wasn't all that surprised when the stock price couldn't sustain the outsized enthusiasm.
But while the stock price did fall, the company has shown its staying power. SoFi expanded from its core activity of student lending into several complementary services, and its low-fee, easy-to-use digital platform continues to be popular with customers. SoFi also acquired a bank, which allowed it to widen its operations, and that's been vital to recent growth.
The bank acquisition was good timing, because the company's student loan segment suffered through an extended (and still ongoing) student loan payback moratorium enacted at the start of the pandemic. But most of its other segments were able to keep generating growth. In its most recently reported quarter, personal loans lifted total loans to a 7% year-over-year increase as they grew 46% while student loans were down 46% year over year and home loans decreased 71%.
Adjusted revenue increased 43% year over year in the first quarter to $472 million. Financial services products were strong in the quarter, with a 37% year-over-year increase in deposits.
This business model, where there are segments that work together but create a diversified offering, is an excellent way to hedge market conditions. This is especially true for a financial services company, where economic trends can impact various services in different ways.
SoFi is ready to run
With its excellent first-quarter results, SoFi management was confident enough to raise guidance for full-year adjusted net revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Annual revenue is expected to be around $2 billion, or about 30% higher than last year, and adjusted EBITDA is expected to be $278 million at the midpoint, or 94% higher than last year.
In the second quarter, management expects adjusted net revenue to increase 32% to 35% and adjusted EBITDA to total $60 million to $70 million, or 225% higher than last year. Much of the growth is coming from new customers. There were 433,000 additions in the quarter for a total of 5.7 million, or 46% more than last year.
High interest rates affect banks and financial services companies in both positive and negative ways. Loans usually decrease and defaults rise, but the bank makes more interest on deposits. In SoFi's case, customers might also be switching over faster as they look for cheaper alternatives and higher rates for their deposits. If SoFi impresses them now, this could greatly work in its favor as they tend to choose to stay on long term.
SoFi is also making excellent progress on improving profitability. Adjusted EBITDA continues to increase, and net loss improved from $110 million last year to $34 million this year.
Student loans are in limbo
As for student loans, the government announced a new loan forgiveness program last week when the Supreme Court struck down its cancellation program. The part of the program that affects SoFi most acutely is cutting in half the monthly payments from 10% to 5% of a borrower's income, and zero payments at a certain income threshold.
SoFi's 2023 outlook assumes repayments starting up again in September, with elevated loan originations in the fourth quarter. This could be slightly impacted by lower payment amounts for the remainder of the year if the new program goes through, but it will more heavily impact the longer-term operations.
If the program remains in place, student loans would be a less profitable business. But changes in government and judicial challenges could do away with it, so management will need to model various outcomes over time to see how well it could perform as part of a continued business. There could be a huge range here.
The foray into other segments then becomes a real game-changer for SoFi, which wouldn't have legs to stand on otherwise. In five years, student loans might be a much smaller piece of SoFi's business. If student loans get back up to speed though, it will likely remain as a core segment.
Interest in SoFi stock is heating up again
Five years from now, SoFi should be a much bigger company even if growth continues to slow. It should have many more customers adopting many more products. But as the economy improves, current growth rates could increase back into the high double digits. Consider when the housing market improves and home buyers look for mortgages again.
It also looks like it's well on the path toward net profitability, and it could be demonstrating increasing net income five years from now.
At the current price, SoFi stock trades at a price-to-sales ratio of almost 5. That's not incredibly expensive for a company demonstrating the kind of growth rates and relevance that SoFi is. It trades at a price-to-book value of 1.7, which is expensive for a bank. But SoFi is a fintech company, not a traditional bank.
SoFi could explode over the next five years, and growth investors should consider buying the stock.
