In today’s market landscape, opportunities for deals are scarce. High-flying tech stocks command lofty multiples, prompting investors to question their current valuations. Conversely, there’s a plethora of value stocks available at lower prices but with less growth potential.
Savvy investors actively seek out those rare instances where high-growth stocks trade at bargain valuations. While such companies carry heightened risk, the potential rewards can be substantial.
Given SoFi Technologies’ (NASDAQ: SOFI) continuous delivery of impressive performance amid robust growth and a low earnings multiple, it’s perplexing to observe its stock price decline. Each time SoFi surpasses expectations, the associated risk diminishes.
Is the market overlooking SoFi’s true value? Let’s speculate on where SoFi might stand in one year and whether this apparent undervaluation presents a compelling investment opportunity.
Another smashing quarter
SoFi stands out as a digital bank catering to college graduates and young professionals, offering a comprehensive range of financial services through its app, covering banking, investing, loans, and more. Its modern banking approach, characterized by user-friendly interfaces and competitive fees, is attracting a rapidly expanding user base, with hundreds of thousands of new accounts added each quarter. This surge in adoption is accelerating its growth trajectory and propelling it into profitability, evident from its stellar performance in the first quarter of 2024.
In Q1 2024, SoFi recorded an impressive addition of 622,000 new accounts, marking a 35% increase from the previous year, while revenue surged by 37% year over year. Notably, this quarter marked the company’s second consecutive quarter of positive net income, surpassing expectations with a GAAP net income of $88 million, significantly higher than the projected $20 million. Diluted earnings per share stood at $0.02, excluding a one-time benefit related to a convertible debt exchange, which contributed to net income.
Besides acquiring new customers, SoFi’s growth is fueled by its financial services productivity loop strategy, which capitalizes on the platform’s diverse offerings to drive greater engagement across its user base. In the first quarter alone, SoFi introduced nearly 990,000 new products to the platform, representing a 38% increase from the previous year.
Things could get much better
Looking ahead, SoFi’s prospects appear promising, with anticipated growth across all key metrics over the next year. The platform’s appeal extends beyond its core customer base to a wider audience, driven by its comprehensive offering of financial services through a single mobile app—an embodiment of the future of banking. While traditional banks embrace digitalization, SoFi enjoys several competitive advantages.
Its status as a pioneer in the digital banking space has cemented a robust brand presence, positioning it as a frontrunner in the industry. Furthermore, SoFi’s inception as a digital-first platform has endowed it with a user-centric design, engineered for functionality and agility, particularly appealing to younger demographics. Additionally, leveraging its roots as a student loan cooperative, SoFi has nurtured enduring relationships with a core segment of upwardly mobile professionals, providing a foundation for sustained growth.
Beyond its core lending operations, SoFi’s diversification efforts have been instrumental in driving recent successes. Moreover, the lending business is witnessing a rebound, buoyed by two favorable trends: the expiration of the student loan pause last October and the potential plateauing of interest rates, even amidst lingering high levels.
In terms of financial outlook, SoFi anticipates adjusted net revenue to surge by 15% for the entirety of 2024, reaching approximately $2.4 billion, alongside a projected net income of about $170 million. These forecasts represent upward revisions since the previous update, underscoring the company’s bullish sentiment regarding its future performance.
What’s wrong with Wall Street?
Despite SoFi’s exceptional performance, its stock experienced a 10% decline following the release of the company’s report. This was attributed to Wall Street’s disappointment with the projected slowdown in revenue growth for the second quarter. SoFi’s forecast of approximately $560 million in revenue fell short of analysts’ expectations of $581 million, while its net income guidance of about $7.5 million was below the average projection of $13 million.
However, if the second quarter mirrors the first, SoFi could surpass these projections significantly. Regardless, investors should prioritize long-term trends over short-term fluctuations and missed analyst expectations. While such analyses provide valuable insights, they do not offer a comprehensive picture of the company’s potential.
Moreover, this situation presents an attractive opportunity for investors to acquire SoFi stock at an appealing valuation, with a price-to-sales ratio of 3 times trailing 12-month sales and a forward price-to-earnings ratio of 37 times for the next year. Investors should not be discouraged by short-term market reactions. Instead, they should consider SoFi’s growth trajectory and the likelihood of its stock price aligning with its performance in the long run.
