Summary
- Shares of SoFi are back in a buy-the-drop situation.
- In the last 18 trading days, SoFi finished green only 3 times.
- SoFi’s member and revenue growth is now deeply discounted.
Shares of SoFi Technologies(NASDAQ:SOFI)are in a short term downtrend that is chiefly defined by macro risk factors, not the digital bank's commercial performance. Because SoFi's member and revenue growth has become too cheap, once again, I am buying!
SoFi: A bank in your pocket for all your financial needs
It is hard to decide where to invest my money these days because the correction of growth stocks is creating more bargains than I could possibly buy. I have already bought PayPal(NASDAQ:PYPL), because of its revenue growth and Venmo/Amazon(NASDAQ:AMZN)partnership, Alibaba(NYSE:BABA), because of its cheap e-commerce growth, Palantir(NYSE:PLTR), because of a large and expanding government business, and now SoFi.
SoFi experiences rapid member and revenue growth because of the firm's easy-to-use personal finance app and roll-out of new financial products in segments like cryptocurrencies, credit cards and investing services. SoFi is a "bank in your pocket", offering everything from home loans to student loan refinancings and insurance products to protect your family. SoFi's product offerings have expanded greatly during the pandemic and the digital bank offered 4.3M different products to its member base in the September quarter, showing an increase of 108% year over year. The majority of such offerings relate to financial services which serve a customer base that has shown appetite for new investment products, like fractional investing or digital currencies.
As you may already know, SoFi's business soared during the pandemic. As people were forced to work remotely, mostly from home, SoFi's personal finance platform experienced a surge of customer sign-ons, and this surge is lasting to this day. SoFi's customer base swelled to 2.94M in the third-quarter. During the pandemic - the period between Q4'19 and Q3'21 - SoFi added 1.96M new members to its ecosystem, dramatically expanding the firm's cross-selling potential. This means that SoFi tripled its customer base in the last seven quarters and acquired an average of 93 thousand members every month since January 2020. SoFi's customer acquisition rate, however, has slowed this year because people have started to return to work and lockdown measures were eased. SoFi's member growth in the third-quarter was still 96% year over year, but it marks a slowdown from Q1'21 and Q2'21 where member growth rates exceeded 100%.
SoFi added 126 thousand new members to its platform each month in the third-quarter. If SoFi can add around 120 thousand new members to its ecosystem each month in the fourth-quarter, which is possible and plausible, the personal finance company is set to end the year with around 3.3M members. Although SoFi may experience a continual slowdown in customer sign-ups post-pandemic, the firm is set to continue to grow at very high rates in the future. I estimate that SoFi will be able to build up its member base to around 9M members by FY 2026.
The personal finance business is working hard on becoming a one-stop-shop and offer customized lending and investing products to every single member in its ecosystem. And there is a tremendous opportunity for continual momentum in customer acquisitions. This is because about half of Americans use at least two different banks to cover their financial needs, based on information from Go Banking Rates. SoFi, through its easy-to-use personal finance app and massive growth in the number of lending and financial service products, is uniquely positioned to sign on millions of new customers this decade.
SoFi's growth is undervalued
Because of the ongoing ramp in customer acquisition and revenue momentum, I believe that SoFi's drop in pricing is creating a unique opportunity to buy this undervalued growth stock. In the last eighteen trading days, SoFi traded down in fifteen days. The drop in pricing occurred chiefly because a set of macro factors is weighing on the market, including Omicron variant concerns, high inflation and a supply chain crisis that still has not been solved.
Because of this undeserved drop in pricing, shares of SoFi now offer revenue growth that is 34% cheaper than in November. SoFi is expected to do sales of around $1.0B this year, based on the firm's guidance, which was raised from $980M last quarter. The revenue forecast for FY 2021 implies between 61% and 63% revenue growth.
For FY 2022, SoFi is projected to see $1.5B in revenues, implying a year over year revenue growth rate of 47%. SoFi is set to continue to grow much faster than most companies until, at least, FY 2025, which means the P-S ratio is set to drop rapidly.
Risks with SoFi
As the economy moved on from the COVID-19 pandemic, SoFi's member and revenue growth has started to slow. SoFi still added the second-highest number of new members to its platform in the third-quarter, but acquisition growth is slowing. This suggests that growth will continue to moderate unless, for reasons that would also be very concerning, the Omicron variant leads to a reboot of the pandemic, with additional vaccine requirements and shutdown orders to mitigate the spread of this variant.
Commercially speaking, SoFi will face tougher competition from other FinTechs and banks in the future that will do everything they can to resist SoFi's disruptive digital bank model. SoFi's personal finance platform itself has no moat, however, which means rivals can build similar digital banks and compete on aggressively low margins.
Final thoughts
Shares of SoFi have dropped very steeply since November, although the firm's third-quarter showed commercial success regarding customer acquisition and product growth. SoFi also raised its forecast for FY 2021 revenues. Because of the 34% drop in pricing since November, SoFi's revenue and member growth is now heavily discounted again. SoFi - next to PayPal, Alibaba and Palantir - is a stock I am buying during this year-end sale!