SoFi Technologies: A Rare Buying Opportunity (NASDAQ:SOFI) (2024)

Investment thesis

My previous bullish thesis about SoFi Technologies (NASDAQ:SOFI) did not age well as the stock slid by 12.5% since early March. This was a much weaker performance compared to the broader U.S. stock market.

However, for a young company like SoFi a temporary inconsistency of its stock's performance against the company's fundamentals is common, in my opinion. What is more important is that the business continues its aggressive expansion, and the management is working hard on expanding SoFi's ecosystem of services to maximize its cross-selling potential. Historical share price chart suggests that the stock rarely goes below $7 per share, and the last time it did there was a massive rally to $10. The valuation became even more attractive after the recent pullback, and I reiterate my "Strong Buy" rating for SoFi.

Recent developments

The company released its latest quarterly earnings on April 29, surpassing consensus revenue and EPS estimates. Revenue grew by 26.2% YoY. The bottom-line performance was also solid with the adjusted EPS expansion from -$0.05 to $0.02 on a YoY basis.

I will not deep dive into the latest earnings report because I believe that my SA peers already gave their valuable insights. What I want to underline is just that SoFi's key business metrics continue growing with double digits, if we look at the latest presentation. When any business demonstrates strength across all key business indicators, this is a strong bullish indicator because business metrics drive long-term financial success.

One of the fundamental strengths that is developing within SoFi is it cross-selling potential. The management reiterated its commitment to develop new services and products during the earnings call. According to the CEO, Anthony Noto, the pipeline of new potential partnerships and services is robust. There also was Mizuho Technology Conference on June 12, where the company's CFO, Chris Lapointe, also said that the management is working on rolling out new products and services, which will help to deliver a 25% revenue CAGR over the next three years. The CFO's optimistic forecast for the next three years' revenue growth is likely not priced in by the market because consensus estimates for FY2025-2027 are much more modest. This is a big bullish sign to me meaning that SoFi's revenue potential is significantly underestimated.

Strong improvement in SOFI's EPS profile is another bullish indicator. The business model is definitely sound as it demonstrates a consistent correlation between revenue growth and profitability improvement. What is also crucial is that the EPS shows solid expansion despite SOFI's aggressive growth in outstanding shares. Dilution is inherent to almost any young rapidly growing company, but it is highly likely temporary and as SOFI gains financial power, the dilution pace is highly likely to decelerate.

From the technical perspective, current share price looks like a good entry point. First, SoFi's share price rarely gets this low and the last time the stock dipped below $7 per share there was a big rally to above $10 per share. Second, the RSI indicator looks quite low at 41.57.

Despite the stock sliding rapidly in May in June, the company's CEO has been buying consistently. Usually, I do not pay much attention to rare insider selling because even CEOs have their bills to pay, and they have to get cash for their personal needs somehow. However, when the CEO is buying consistently it means that he or she firmly believes that the stock is undervalued, and it has a lot of upside ahead.

Another notable potential catalyst that we should not discount is a massive 17.7% short interest. I could have said that it is a problem for investors if SoFi's fundamentals were deteriorating. But the reality in SoFi's case is opposite and for the stock of a company with improving fundamentals high short interest is likely to be good as unlocking one of other positive catalysts will put pressure on short sellers and this might lead to higher gains.

Valuation update

The stock lost 21% of its price over the last twelve months, substantially lagging behind both the U.S. broader market and the Financial Sector (XLF). SOFI is also underperforming in 2024 with a 35% YTD share price decrease.

At the same time, SOFI's valuation ratios look quite attractive. I prefer to ignore its sky-high TTM and forward P/E ratios because the company just achieved its profitability and a massive P/E contraction is expected by consensus in the next few years. I am not simulating a DCF model for SOFI because its projected FY 2026 forward P/E ratio certainly indicates substantial undervaluation. Moreover, let me remind readers that the management's revenue growth projections are much more optimistic compared to consensus. This means that the P/E contraction pace below is also very conservative.

Since SOFI is a bank both by substance and by form, I also want to highlight its valuation attractiveness from the tangible book value [TBV] perspective. According to the latest balance sheet, SoFi's total TBV is close to $4.1 billion.

According to the above guidance, the management expects to increase its TBV by around a billion by the end of FY 2024. That said, the TBV will highly likely be above $5 billion by the year-end. With the current $6.9 billion market cap it means that SOFI's one-year forward Price/TBV is around 1.35. This is notably lower than the same ratio of the three U.S. largest banks.

Of course, SoFi's scale is dream away from these three giants. On the other hand, none of these giants are expected to deliver a 25% revenue CAGR over the next three years. That said, the comparison looks fair to me, and it indicates substantial undervaluation. These three giants' average Price/TBV ratio is 1.79. Multiplying SoFi's expected $5.1 TBV by the year-end by the factor of 1.79 gives me the company's fair capitalization at $9.1 billion. This means that there is around 32% upside potential for the next twelve months.

Risks update

I have been giving the "Strong Buy" for SOFI since last July and the stock lost declined by 31% since then. There were sharp spikes and plunges since last July. As we saw in the above analysis, fundamentals keep improving and the CEO is highly likely confident in the stock which we see from his consistent purchases. But the stock sometimes moves in opposite directions with improving fundamentals. Therefore, readers should be ready to keep this stock for years before it delivers exceptional returns. Trying to trade or time this stock is extremely risky.

As new generations of Americans are becoming more technologically prone, the demand for fintech services is poised to grow. This means that the competition for SoFi will likely intensify over time and that might adversely affect its revenue growth potential. For example, one of the most popular fintech companies in Europe, Revolut, is expanding closer to the U.S. as it recently received banking license in Mexico. According to the top management, expanding into the U.S. market is Revolut's long-term goal.

Bottom line

To conclude, SoFi is still a "Strong Buy". As a long-term investor who makes decisions based on fundamentals, I prefer to ignore the stock's volatility because I see great growth potential. Since I plan to hold this stock for years, the current share price weakness gives me a good opportunity to increase my position in SOFI.

I am a highly experienced Chief Financial Officer (CFO) with a strong background in the oilfield and real estate industries. With over a decade of experience in finance, I have led numerous complex due diligence efforts and M&A transactions, both domestically and internationally.In recent years, I have developed a keen interest in equity research and analysis of public companies. This interest has led me to render equity research services for a Dubai-based family office with over $20 million in assets under management (AUM). My expertise in finance allows me to provide valuable insights and recommendations to clients seeking to make informed investment decisions.I pride myself on my ability to analyze financial statements, evaluate market trends, and identify key drivers of growth in different industries. I am passionate about staying up-to-date on the latest developments and trends in the equity research industry, and I am always seeking to enhance my skills and knowledge through continuing education and professional development.