$SoFi Technologies Inc.(SOFI)$
We’ve got a big day ahead on Monday morning before the market opens, as SoFi is set to release its latest quarterly earnings. This is a company that’s up 137% over the past year and is currently trading near the top of its 52-week range. However, while the valuation is extremely high compared to others in the sector—where the median sits at 12.1—SoFi is currently trading at a premium of 169% above the sector.
On the positive side, one of the things we really like about SoFi is the strong growth in its membership base. Each quarter has seen double-digit growth, and in Q3 alone, the company added about 756,000 new members. By the end of Q4, we expect them to cross the 10 million member mark.
As for the reasons behind this high valuation, it’s largely driven by SoFi’s impressive growth. Year-over-year revenue has increased by 32%, well ahead of the sector's 5% growth. Forward-looking revenue is expected to grow at 26%, which is significantly higher than the sector’s anticipated 6%. Their adjusted EBIT growth of 87% is also a standout, compared to the sector's 9.5%.
That said, it’s important to mention that SoFi’s profitability does have room for improvement. Their gross margin is solid at 83%, far better than the sector's 59%, but they’ve been burning cash—losing $1.2 billion in cash flow from operations over the past year. In contrast, the sector is generating positive cash flow, with a figure of $141 million.
However, a bright spot is that for the first time in Q3 2024, SoFi reported a bottom-line net profit of $214 million on a trailing 12-month basis. This is a promising sign, and we expect the company’s cash flow to start turning around in the future. Looking ahead to Monday’s earnings release, SoFi is projecting a 95% year-over-year growth in earnings per share, which is impressive. For the next two quarters, they’re forecasting even stronger triple-digit growth—183% in Q1 and 66% in Q2.
Another positive is that SoFi has consistently outperformed management’s targets, including a 100% track record of exceeding their forecasts over the last four quarters. If that trend continues, it could signal strong earnings for the full year. While the forward price-to-earnings ratio is currently high, it’s expected to come down to 62.4.
Guidance
One thing we like about SoFi’s management is their ability to exceed guidance. For example, in Q3, the guidance range was 625 to 645 million, but they actually reported 689 million, and the same outperformance extended to adjusted EBIT and margins. We’ve also been impressed by their continuous revisions upward of their full-year guidance. Most analysts believe SoFi will not only outperform in this upcoming quarter, but also increase their guidance once again, which has become a hallmark of the company.
Risk And Challenges
That said, there’s a potential risk: If people continue to expect SoFi to keep raising guidance, but they only maintain it, that could affect the stock price. It's hard to predict, but it’s something to watch.
Overall, we’re encouraged by SoFi’s steady upward trajectory, with net revenue growing by 30% in the latest quarter, along with improving margins and efficiencies. These are all signs of a high-quality company, and we’ll be keeping a close eye on what’s next.
Looking ahead, we also like the fact that institutional investors hold about 38% of SoFi’s shares. While they've sold around $140 million worth of stock over the past year, they've also been purchasing a significant amount during that time, indicating strong institutional confidence in the company. Additionally, on December 16th, insiders bought approximately 31,000 shares, totaling about $500,000. Insider buying is generally viewed as a bullish signal, as it suggests that management believes the share price will rise over the long term.
Another noteworthy point is that analysts are starting to raise their price targets for SoFi, something we haven't seen in quite some time. William Blair, for example, initiated coverage on both SoFi and Affirm Holdings, and they now believe SoFi will outperform. They cite the company’s ability to capitalize on the fact that traditional banks, credit cards, and consumer finance solutions are struggling to keep up with the demands of younger consumers. They believe this is a market that SoFi can effectively tap into. While the fintech sector is competitive, William Blair sees SoFi as a leader, thanks to its digital user experience, accessible consumer finance products, and flexible payment options. In fact, they go as far as to say that SoFi is on track to become a top 10 financial institution in terms of deposits. They also anticipate that SoFi will see multiple expansions, steady organic revenue growth, stable credit performance, expanding capital cushions, and ultimately improving profitability.
When we look at SoFi's performance over the past year, it has been the best-performing company in its sector, up 137%. However, it's important to remember that past performance doesn’t guarantee future results. That said, if SoFi can continue this momentum, it could bode well for its long-term growth.
As we prepare to look at our valuation, it’s worth noting that the company's growth has been impressive, with double-digit year-over-year increases. One thing to watch in their upcoming earnings is whether their top-line revenue growth starts to slow. Additionally, shareholders have seen some dilution over the past few years, which is something to consider. However, this isn't a major concern if SoFi continues to outperform the S&P 500.
Valuation
Now, looking at SoFi's intrinsic value, we’ve calculated it to be $18.40, based on our discounted cash flow (DCF) model. This valuation is derived from a conservative growth rate of 12% year-over-year, which is lower than analyst expectations. With our discount rate applied, the intrinsic value of $18.40 is above the current market price, which suggests only a 2% upside—roughly in line with what we consider fair value at this moment.
If we apply a 10% margin to our intrinsic value, it would be $16, representing a 10% downside. At an 8% margin, the downside increases to 21%. However, if you’re someone who believes those numbers are too conservative and you’re more optimistic about SoFi’s future, for instance, if you expect 20% growth moving forward, the intrinsic value would rise to around $31.
Today, we’re focusing on the 12% growth rate, but it doesn’t stop there. We also apply a margin of safety to ensure we're factoring in potential risks. Typically, we start with a 10% margin and execute on that if the stock meets our three key criteria: a strong economic moat, solid financials, and positive forward-looking data. Based on that, if you're looking for a 10% margin of safety, the buy price would be around $16.55; at 20%, it’s closer to $14.71; and at 25%, it drops to around $13.80.
That said, if you’re a long-term investor, short-term fluctuations might not matter as much to you. For those with a 5- or 10-year horizon, these movements can seem less important. For example, if SoFi reaches the heights of PayPal in the next 2-3 years, based on its current market cap, SoFi’s price could rise to $84 per share, equating to a 368% upside.
Conclusion
It’s important to note that these valuations are based on historical data, and if SoFi posts strong earnings, we may update our valuation to reflect that. This could lead to a much higher price target. Ultimately, your perspective on the stock depends on whether you have a short-term or long-term view. If you believe in the long-term growth potential, SoFi could very well be an $84 stock.
As for Wall Street, the consensus currently values the company at $14, suggesting a downside of around 22% by the end of the year. However, if SoFi delivers solid earnings, which I believe is quite likely given their consistent performance and upward revisions to guidance, that downside could be mitigated. SoFi continues to grow its member base and other key metrics at a double-digit rate, which is a positive indicator.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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