Is This Fintech Set To Explode?

Fintech lender and financial services provider SoFi (NASDAQ:SOFI) was among the companies hit hard by the stock crash of 2021. At its peak, the company’s shares traded at over $25. Today, the stock is priced under $10 per share.

Recent developments, however, have given SoFi some renewed momentum and opened up the strong possibility of a turnaround.

So, how much upside could the stock offer to investors who buy in at today’s prices?

Key Points

• SoFi’s P/E ratio is high at 80x, but its price-to-cash-flow is a more modest 19.9x.
• Analyst price targets range from $4 to $13, with institutional investors showing confidence by purchasing $750 million in shares over the last year.
• With 8 million users and a broad financial services ecosystem, the company is set for long-term growth.

A Look at SoFi’s Current Valuation

SoFi’s valuation is an interesting mix of high and low multiples. At over 80x forward earnings, it’s tempting to immediately write off the stock as overvalued.

The price-to-cash-flow ratio, however, is a much more modest 19.9x. SoFi’s price-to-sales ratio, meanwhile, is 3.6x.

While this P/S ratio is relatively high, it’s important to remember that SoFi has earned its stripes as a high-growth fintech firm.

Where Do Analysts See SoFi Going?

Analyst forecasts for SoFi offer some insights into the stock’s intrinsic value, though views on Wall Street appear to vary widely.

Analysts price targets range from as low as $4 to as high as $13 per share. Given the stock’s current price, these numbers essentially imply anything from a 50% loss to a 50% gain over the coming 12 months.

SoFi’s median price target is $8 per share, aligning closely with its most recent price level.

About 60% of the analysts covering SoFi rate it as a Hold, potentially suggesting that a majority of analysts may believe the stock to be more or less fairly valued.

It’s worth noting that Wall Street has taken the opportunity to buy up a considerable amount of SoFi over the last year while SoFi was trading a bit below its current level.

Over the last 12 months, institutional investors have bought nearly $750 million worth of SoFi shares and only sold a little over $75 million.

This stark contrast between buying and selling suggests that institutional buyers likely see ample long-term value in SoFi, even if it may take some time for the returns to begin materializing.

Will SoFi Continue Growing?

Another point in SoFi’s favor comes from the fact that the company has recently achieved narrow profitability.

In each of the past three quarters, SoFi has reported positive GAAP EPS, though each share has only earned $0.07 during that period. Continued earnings growth may well provide significant support to share prices.

Revenue growth has slowed in recent quarters, but SoFi still reported a 27.2% increase in its total revenues in Q2. On a trailing 12-month basis, this brought the company’s revenues to $3.40 billion.

Forward revenue growth is expected to be somewhat lower at 22.6%. With higher revenues, it’s probable that SoFi will be able to gradually expand earnings.

On a longer time horizon, SoFi’s growth may well be supported by the large number of users it has managed to add over the last several years. In 2020, the company had just 1 million users, compared to over 8 million today.

Unlike other fintech companies that just provide banking, loans, insurance or another single service, SoFi has an extensive ecosystem that provides a large range of different services. As such, this user growth provides SoFi with the opportunity to market several products to customers who may initially only have joined for just one.

How Might Lower Interest Rates Affect SoFi?

As a fintech stock whose best years of earnings are likely still well into the future, SoFi is likely to benefit from lower interest rates as the Fed gradually makes cuts. High interest rates negatively affected SoFi’s lending business, a segment that accounts for a majority of the company’s revenues. Lower rates could help the company’s lending activities, reduce the interest it pays out to depositors in its banking business and provide market support for growth stocks like SOFI.

What’s a Fair Price for SoFi?

Fair value for SoFi in analysts eyes sits at $8.73 per share, though the range goes from as high as $13 per share to as low as $4 per share.

With SoFi’s earnings still being very low and its P/E ratio at a high level, it may be best to use revenue growth as a guide for SoFi’s pricing.

Assuming revenues rise by around 30% as expected over the coming 5 years and the P/S ratio remains around its current level, SoFi shares are likely to trade substantially higher in the future.

This view may not take into account the upward pressure provided by additional interest rate cuts. By the end of 2025, the Fed is expected to lower interest rates to around 3.5%. If this occurs, growth stocks would likely become more attractive and higher valuation multiples could be justified. Further cuts in 2026, likewise, are apt to provide continued support for stocks like SOFI.

Taking all of this into account, it appears likely that SoFi’s fair price is somewhere in the range of $9 to $13, with $13 being a probable best-case scenario if interest rates fall or revenues and earnings increase faster than expected.

The stock’s currently low valuation, favorable macroeconomic developments and the recent turn toward profitability make it fairly unlikely that the stock is actively overvalued at current prices.

SoFi is still something of a speculative investment. With the company only having recently turned a profit, it’s difficult to tell how high its earnings could go or how long it may take to get there.

Though most trends are in SoFi’s favor, investors could still see significant volatility in the company’s shares as the market continues to price in new developments.

As such, SoFi may be a decent buy for risk-tolerant investors hoping to profit from the return of lower interest rates and a rebound in the fintech market. The stock could have considerable long-term upside, especially if SoFi can maintain its double-digit revenue growth rates while also raising its earnings. Even with its risks, SoFi may very well generate strong returns as it continues to expand and may be a good addition to a growth portfolio.