What can be anticipated for SoFi's share price in the subsequent five years?
What can be anticipated for SoFi's share price in the subsequent five years?
SoFi Technologies' (SOFI 5.03%) business expansion has been unstoppable since its public debut in 2020. On the flip side, its stock value hasn't mirrored this growth. SoFi's stock performance has lagged behind the market, delivering a total return of 46%, while the S&P 500 index holders have seen a return of 77%. For years, the share price has underperformed index funds, which is undoubtedly disheartening for investors.
Despite the stock's performance, the company's growth is remarkable. In a span of years, its revenue has skyrocketed by 263%, positioning SoFi as one of the fastest-growing companies in public markets since its stock listing. This raises the question: Is SoFi a buy now, and where will it stand five years from now? Let's delve deeper into this innovative fintech company.
Rising Usage and Brand Recognition
Born from Stanford University in 2011 as a student loan marketplace, SoFi has evolved into a comprehensive mobile financial application. SoFi offers banking services, investing, loan products, even cryptocurrencies, and private market investing. Its aggressive marketing campaigns and all-encompassing offering have fueled steady user growth. In the third quarter, SoFi boasted 9.4 million members, up from 1 million in Q1 2020.
Over the next five years, I anticipate that this growth strategy will yield even more usage and brand awareness. The U.S. alone houses over 100 million households, that's a vast market for practically any financial service a consumer might need. Although the growth rate will inevitably slow as this becomes a competitive industry, SoFi's appeal to users is undeniable. I wouldn't rule out SoFi hitting 20 million customers in five years.
Diversifying Beyond Loan Revenue
In the past, SoFi's business predominantly revolved around lending, which encompassed student loans, personal loans, and home loans. Today, SoFi is still engaged in lending, growing its loan book as it acquires customer deposits. As of the third quarter, total outstanding loans had reached $25 billion, a 6% increase from Q2 2024.
Undoubtedly, investors were skeptical about SoFi's lending performance due to its speedy growth. However, SoFi has allayed these concerns by displaying loan performance data that indicates its current loans are performing better than 2017 levels, with less borrower default.
Moving forward, I foresee SoFi distancing itself from lending over the next five years. This shift has already started in the recent past. Today, financial services revenue (credit card swipe revenue, investing brokerage revenue), and technology platform revenue account for 49% of SoFi's overall revenue, surpassing the 24% share it held in Q1 2021. These segments are growing rapidly and are helping SoFi diversify its operations, making it less susceptible to lending downturns.
SoFi's technology platform, called Galileo, enables third-party financial institutions to perform digital account setups and direct deposits. This high-margin revenue, which totaled $100 million in the third quarter, grew by 14% year over year. Galileo and technology services revenue should contribute to SoFi's earnings growth during the next five years.
SoFi's Future Prospects
Valuing SoFi's various business segments can be complicated. The lending segment should be appraised like a bank, considering book value and net interest income as primary valuation metrics. On the other hand, the other segments like financial services and the technology platform should be valued on revenue and contribution margin.
Let's make an attempt to simplify things and consider if SoFi stock is a purchase at its current prices. With its impressive user acquisition and customer deposit momentum, I believe SoFi's revenue can double over the next five years, reaching $5 billion. However, the company's current earnings are minimal. I am optimistic that profit margins will reach 10% (or possibly more) once the business has matured in five years, bringing SoFi's annual net earnings to $500 million.
This would translate to a P/E ratio of 28 in five years, which is significantly higher than the current P/E of the S&P 500, currently less than 26. While SoFi's revenue could surpass the $5 billion mark in five years, and profit margins exceed 10%, under this scenario, the stock would still trade at a premium P/E multiple five years from now. From my vantage point, the stock appears somewhat overvalued at present levels, and I wouldn't bet on shares gaining much more in five years.
Despite the current stock underperformance, investors should consider SoFi's future prospects in the finance and investing sector. The company's diversification beyond loan revenue, particularly its technology platform Galileo, is expected to contribute significantly to its earnings growth over the next five years. With a potential doubling of revenue to $5 billion and profit margins reaching 10%, SoFi's annual net earnings could reach $500 million, positioning it as a potential buy for investors interested in the fintech sector. However, the stock's current valuation at a P/E ratio of 28 in five years may be considered somewhat overvalued, suggesting limited room for further price growth in the short term.