Summary

• SoFi Technologies stock has surged 170% since our initial bullish call, driven by robust member growth, revenue diversification, and improving margins.

• SOFI's comprehensive financial product offerings simplify personal finance management, fostering user retention and deeper monetization opportunities.

• Despite its recent rally, SOFI's valuation remains attractive given its strong growth prospects.

• We rate SOFI a 'Strong Buy'.

In August 2024, we wrote our first-ever article on SoFi Technologies, titled "Has SoFi Technologies Finally Reached A Turning Point?".

Prior to the article, SOFI's stock had been 'down in the dumps' following a bumpy launch via SPAC, but we thought that the firm's compelling member growth, accompanying revenue growth, and improving margins might spell an inflection point - sometime soon - for the company.

In sum, in this first article, we made the case that SOFI had huge potential to grow, for a long time, into the future. The company's core membership offering had proven to be sticky, and with deepening monetization and a more diverse revenue mix, the stock could be 'one to own' for the long haul.

Since our bullish call at $6 per share, the stock has rallied more than 170%, growing to ~$16.50 per share and outperforming the S&P 500 by more than 10x:

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In this article, we wanted to revisit the company to see how our thesis was faring.

Is the company still set up for success? Has the stock become dangerously expensive?

Today, we'll explore SOFI's recent results, take a look at the company's continued prospects, and explain why we think the stock is still in the early innings of a long, extended rally, despite the recent strength.

Sound good? Let's dive in.

Our SoFi Thesis

In case you didn't read our first piece on SOFI, it might be worth explaining a bit why we like the stock so much.

In short, SOFI is a leading neobank, a new-age financial services company that offers a wide array of financial products to clients. SOFI's range of offerings is robust, and includes loan products, checking and savings accounts, credit cards, commission free investing, credit score monitoring, and insurance (through a third-party partner).

If you're a user of any one of these products, then when you're looking to add another financial account that services a different need, there's really no need to go anywhere else:

sofi.com

In the past, organizing your personal finances could get messy and complicated, and many people, to this day, still have different providers for insurance, banking, lending, and more. With SOFI, all of these functions remain under one roof, and in a single app. This makes people's lives, from an admin perspective, significantly easier.

This is a significant value prop, in our opinion.

This consolidation of retail financial products also allows users to have better insights into their own financial health, which means that they can make better decisions over the long haul.

Altogether, the combined product offering and insights allow users to live a healthier financial life, which has led to significant growth for SOFI.

SOFI's Earnings

On the member front, SOFI added another 756K users in Q3 of '24 (growth of 35% YoY), and financial products grew even more, with more than 1.06 million products added (growth of 31% YoY):

IR

IR

This means that SOFI is doing a good job of acquiring users and deepening its relationship with said members. Once a financial services customer is 'in the door', there are a multitude of ways that SOFI can make money off of that relationship.

We're betting that as this user cohort gets older and richer, the amount of money SOFI will be able to make will grow exponentially.

We see three routes for growth when it comes to SOFI's revenues:

• More Users

• Deepening Monetization Per User

• Users' Wealth (and thus, monetizability) Increasing Over Time

Given SOFI's execution chops in getting to this point, there appear to be strong tailwinds for each of these drivers, and it seems like the company has barely scratched the surface when it comes to the Total Addressable Market.

This virtuous cycle is behind the company's significant revenue growth, which keeps moving up and to the right like clockwork:

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Also buttressing this top line growth is the company's 'Technology' segment, which is basically a B2B white-label business for SOFI. If you're a startup looking to offer financial products to clients, then you can integrate SOFI's technology to your product for a fee.

In this way, SOFI can really be seen as a financial platform company, with a significant first-party business using the same rails that clients get. The tech platform business is smaller, but it's still worth several hundred million per year in revenue:

10Q

In Q3, SOFI saw a big, positive swing in TTM net income, as an unusually negative Q3 '23 number dropped off and was replaced with another positive net income result, this time to the tune of +$61 million:

TradingView

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Given that this result - with the large negative number dropping off of TTM results - was largely foreseeable in advance, we think that the stock mostly rallying after the report shows that the market doesn't understand the story here as well as we do.

Thus, going forward, we're highly positive on SOFI's potential FY'25 earnings.

With operating margins improving at a sequential, substantial rate, we're bullish on the continued gains in operating leverage SOFI can unlock as it gains and monetizes users in a virtuous loop:

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If things continue apace, we could see SOFI's FY'25 results come in around $3.5 billion in revenue (representing ~30% YoY growth), alongside operating income of roughly ~$390 million (representing continued margin growth towards 11%). In our mind, these are base case estimates based on the company's progress so far, historical rates, and our expectations.

SOFI's Valuation

But what is the stock worth?

As we mentioned at the start, SOFI's stock has rallied significantly in the last 6 months, and shares now appear more fully valued than they did before.

At present, SOFI is trading at roughly $16.8 billion in market cap.

For 2024, this means that we're probably looking at a sales multiple of roughly ~6.1x sales, with an operating multiple of roughly 67x. This is definitely expensive, even in an already-pricey looking market.

However, taking our FY'25 expectations into the mix, it's entirely possible that by the end of this year, if the stock were to trade flat, we could see a sales multiple of only ~4.8x, with an operating multiple of only 46x. This also bakes in a highly conservative amount of margin improvement. If we go with our prior projections from our first article, then you could be looking at $400 million in net income:

If you extrapolate a 25% YoY top line growth rate, you'd get FY25 revenues around $3.22 billion. If operating expenses grow to $2.58 billion and NIMs only decay ~10% as rates come down, then you could easily end up with ~400 million in net income for next year.

There are a lot of assumptions inherent to this projection, but we don't think that any specific assumption appears outlandish. We're a bit more bullish than analysts on this, but that's down to the CEO's track record of under-promising and overdelivering.

This would give you a FY'25 P/E of 42x.

Again, this appears 'expensive', but remember that SOFI is an incredibly fast-growing company, with long tail revenue growth drivers in play. This means that every year you hold the company, the multiple will likely get cheaper and cheaper, to the point of (potentially) being a low-teens multiple within the next ~4 years:

PropNotes

This model assumes a slowing top line growth rate of -2.5% from 30% YoY sequentially, along with growing operating margins towards 20%. We think both of these are conservative estimates, especially when compared with other companies like Nubank (NU) that are further along the growth curve with a model like this.

Alternatively, if the stock keeps the same multiple and simply grows at this rate over the interim, then you're looking at much better-than-average returns through the end of the decade.

Either way, we see SOFI's current valuation as an opportunity, not a risk.

Risks

That said, there are some risks to be aware of when it comes to potentially investing in SOFI at this point.

First, the company does still generate a good portion of revenue from net interest income received on the loan book, which presents considerable rate risk and default risk, if the credit cycle or economy turn south.

Similarly, SOFI's multiple could easily come in, in the event that rates don't continue lower like the market is currently anticipating. Higher rates equal lower multiples, both due to the organic business impact, as well as the NPV calculation on future earnings.

Finally, any adverse action from regulators around SOFI's business practices (which we think is unlikely), would be a material negative.

Summary

Overall, though, we see SOFI as a relatively de-risked play in the personal finance space, with significant room to grow and monetize its membership over the next few decades.

While the valuation may give some investors sticker shock, we think the company's trajectory, which appears stable, should make an investment at today's price an attractive proposition.

Thus, we're re-iterating our 'Strong Buy' on SOFI.

Stay safe out there!