Shares of fintech company, SoFi (NASDAQ: SOFI) are down 78% from all-time highs valuing it at a market cap of $4.6 billion. A weak macro environment driven primarily by inflation and rising interest rates has resulted in a broader market sell-off in the last 15 months.
Moreover, the recent collapses of Silicon Valley Bank and Credit Suisse (NYSE: CS) have spooked Wall Street as investors are wary of owning bank stocks such as SoFi.
But the meltdown in valuations provides investors an opportunity to buy assets at a lower multiple. So, let’s see if it makes sense to own Sofi stock right now.
What does SoFi do?
SoFi provides various financial services, including student loan refinancing, personal loans, mortgage loans, investment services, and banking services. It generates revenue through various channels, including interest income on loans and investments, origination fees, and other service fees.
SoFi earns revenue by charging borrowers interest rates that are higher than its own cost of funds and by charging fees for loan origination, loan servicing, and investment services. Additionally, the company generates revenue by earning interest on its members' deposits and by offering credit cards, which also generate fees and interest income.
SoFi has also partnered with other financial institutions to offer their products and services through its platform, generating referral fees and revenue-sharing agreements.
In 2022, SoFi obtained a bank license post the acquisition of Golden Pacific Bancorp. So, it now accepts deposits, while previously, SoFi had to sell loans to financial buyers or use debt securitization to access capital.
As customer withdrawals from regional banks have accelerated in March, SoFi is now looking to increase the limits on insured deposits to $2 million, up from $250,000. SoFi also claimed its uninsured deposits now stand at $642 million out of a total of $7.34 billion, which is less than 10% of total deposits.
In fact, SoFi ended 2022 with 5.2 million customers, which suggests the average depositor held $1,400 with the bank.
SoFi stock is priced at a discount
Soon after the financial crash of 2008, regulators drafted rules to lower the overall risk exposure of banks. So, banking companies must adhere to multiple capital requirements, such as maintaining the required CET1 ratio.
This metric basically measures a bank's capital against risk-weighted assets, showcasing the company’s ability to handle periods of economic downturns. SoFi ended 2022 with a CET1 ratio of 14.6% which is much higher than a majority of the banks on Wall Street.
SoFi has increased revenue from $442 million in 2019 to $1.57 billion in 2023. Analysts now expect sales to touch $2.5 billion in 2024. So, SoFi stock is priced at less than two times 2024 sales which is quite cheap.
It is also trading at 19 times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in 2023, which is very reasonable for a growth stock.
While SoFi stock is attractively priced, it remains a loss-making company. In the last 12 months, SoFi’s selling, general and administrative expenses surged over $1.1 billion from $418 million in 2019.
The company emphasized its lending and technology businesses are profitable, which is offset by widening losses in the financial services segment that continues to burn cash. In Q4 of 2022, SoFi reported a loss of $40 million.
SoFi expects to book a profit by the end of 2023, which should drive share prices higher as market sentiment improves. Given consensus price target estimates, SoFi stock is priced at a discount of 30%.
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