Innovative fintech SoFi Technologies (SOFI, Financial) has had a successful year, but its shares are still trading at over 40% below their 52-week highs. In 2022, the company's shares suffered a downturn as investors favored stable and profitable companies over speculative ones. Despite the challenging macroeconomic conditions, however, SoFi managed to maintain noteworthy growth, even if it hasn't become profitable yet.
SoFi has demonstrated impressive adaptability and diversification, especially with its investments in deposit insurance. These positive developments are likely to provide some reassurance to investors who may have been concerned about the company's long-term stability.
Despite several favorable business developments, I do understand the market's hesitance, and investors should remain cautions on SoFi given the banking industry is still dealing with a liquidity crunch. While SoFi has taken measures to mitigate risk and improve its financial standing, both known and unforeseen dangers could still impact performance.
SoFi continues to grow at a breathtaking rate
SoFi has disrupted the traditional student loan industry with its innovative approach to finance. Founded in 2011 with a mission to help people achieve financial independence and freedom, the company started out refinancing private student loans and has since grown into a multi-billion dollar entity with millions of members that also offers home loans, personal loans and credit cards.
Even in the challenging economic environment of 2022, SoFi achieved remarkable results with adjusted revenue of $1.5 billion, a 52% increase from the previous year and more than triple the total for 2019. The membership base also expanded by 51%, reaching 5.2 million. SoFi's adaptability and diversification helped the company navigate unparalleled market volatility and macro headwinds to achieve record revenue each quarter of the year.
While SoFi has yet to generate positive net income consistently, management has projected positive net income on a GAAP basis in the fourth quarter of 2023, which would be an encouraging development.
SoFi's future regarding its student loans remains uncertain; however, it's worth noting that the Federal Deposit Insurance Corporation protects the company's deposit accounts. A significant portion of its loan portfolio comprises personal and student loans, which are less susceptible to abrupt interest rate hikes.
Acquisition of Wyndham Capital
SoFi announced earlier this month that it completed its acquisition of Wyndham Capital, a mortgage lender in the FinTech industry, in an all-cash deal. The acquisition is expected to bolster SoFi's position in the market for mortgage loans.
Mortgages are already a lucrative business segment for SoFi, and the lending business has seen robust growth over the past year. While the company's financial services product category achieved 189% top-line growth in the fiscal year 2022, the lending category's growth was slower. However, lending operations, including student loans, personal loans and mortgages, are highly profitable over the long-term, and almost all SoFi's profits come from this segment. In the fiscal year 2022, SoFi's lending activities were the sole source of its contribution profit, whereas the financial services sector incurred losses.
SoFi's acquisition of Wyndham Capital is not anticipated to boost revenue materially in fiscal year 2023. However, SoFi has said that it anticipates the deal "to be accretive within six months." With this acquisition in its most profitable operating segment, I believe the Wyndham Capital transaction could create the potential for profitability in fiscal year 2024.
Student loan risk
SoFi's first business was refinancing student loans, which turned out to be a profitable venture for the company, as it met the borrowers' needs for reduced interest rates - and there was huge room to reduce interest rates on high-interest private student loans. However, the onset of the pandemic in March 2020 and the subsequent freeze on federal student loan repayments by the U.S. government resulted in a decline in SoFi's student loan business. The need for borrowers to refinance their student loans decreased as they had no obligation to make payments on federally held student loans.
SoFi's management was optimistic that the student loan refinancing market would recover in the fourth quarter of 2022, as students were expected to restart payments on their government student debt in January 2023. Consequently, the company included this potential improvement in its guidance for the fourth quarter.
However, the government's decision to link the removal of the student loan moratorium to a student loan forgiveness program, which the courts blocked, has hurt SoFi's student loan business. In response, the U.S. President extended the student loan moratorium for 60 days after June 30, 2023, or until the Supreme Court rules on student loan forgiveness, thereby prolonging the dormancy of SoFi's student loan business for at least the next six months.
Even when the student loan moratorium issue expected to eventually fade away, the rebound of SoFi's student loan business may not be as significant as investors expect. The overall market for student loans has been declining over the past year due to a decrease in the number of people opting to attend college due to the high expenses. This long-term trend presents a risk for SoFi's student loan business.
Valuation
SoFi's price-sales ratio is 3.59, lower than the peak levels in 2021 and 2022. While the stock is not considered cheap, I think it's worth paying for the company's potential for growth. SoFi's projected revenue growth rates of 27% for this year and 23% for the next year are attractive. Moreover, SoFi should soon become profitable, which could link the valuation to a price-earnings ratio instead.
Takeaway
SoFi has shown impressive growth in recent years. Its adaptability and diversification have helped it navigate challenging economic periods, as evidenced by its strong financial results in 2022. With the acquisition of Wyndham Capital, SoFi is set to boost its presence further in the profitable mortgage lending market, which has consistently contributed to the company's profits. While the company has yet to generate positive net income consistently, its focus on market share and membership growth are also important. SoFi's expected 27% revenue growth this year and 23% growth next year suggest that the company has momentum on its side.
