Alongside its fans, SoFi Technologies (NASDAQ:SOFI) stock has its fair share of foes as well. Those skeptical of SOFI stock cite a myriad of concerns to back up their respective bull cases. One in particular has to do with valuation.
Some investors argue that, once fully scaled up, shares in the fintech firm/neobank will trade at a price-to-earnings ratio similar to that of a traditional bank stock. Bank stocks typically trade at high single-digit/low-teens forward earnings multiples.If SoFi reaches scale, its shares will trade at a substantial valuation premium.
SOFI Stock: Still in High-Growth Mode, Despite Lending Slowdown
Only time will tell whether SoFi Technologies succeeds in its quest to become one of America’s ten largest banks. Yet even if SoFi cannot achieve this goal, the company has another path it can pursue to sustain high growth for years to come.
Sure, SoFi’s personal and student lending unit is experiencing some growth challenges right now. The company’s own forecast for this segment to experience a revenue decline this year. However, discussed in a recent Barron’s article, this growth slowdown should be made up for by growth in the company’s two non-lending segments: financial services and technology platform.
Financial services consist of SoFi’s checking/savings account business, as well as its brokerage platform. Technology platform comprises various financial service technology businesses that the company has acquired in recent years, including Galileo and Technisys.
Even after accounting for the lending slowdown, consensus among analysts covering SOFI stock calls for this digital-first financial institution to report a 15% increase in revenue this year. Forecasts also call for earnings to make a big swing, from a full year loss of 36 cents per share in 2023, to earnings of 7 cents per share in 2024.
Pricey on the Surface, but Cheap Upon Closer Inspection
Based on the aforementioned sell-side forecasts, SOFI appears downright pricey. Currently trading for $8.45 per share, against an estimated 7 cents per share in earnings, shares trade for a staggering 120.7 times forward earnings.
However, digging deeper, it’s clear that SOFI stock is not as pricey as it may seem on the surface. For one, after finally reaching profitability during Q4 2023, profitability is expected to increase in an exponential fashion. As I have argued previously, a big reason for this is the company’s high level of operating leverage.
With much of its operating costs fixed, incremental revenue growth could have an outsized impact on earnings. This isn’t a trend set to end anytime soon. As the non-lending segments keep growing, and as the macro factors (inflation, interest rates) affecting the lending segment ease, earnings could more-than-triple, to 24 cents per share, in 2025.
As Valuewalk pointed out back in January, SoFi’s earnings could grow by triple-digits again during 2026 (to 55-80 cents per share), with 20%-25% earnings growth for many years beyond. With this level of earnings growth, reaching scale/maturity is clearly still many years away.
The Verdict: Buy This Full-Fledged Fintech
Yes, improved lending volumes may play a big part in the company’s earnings growth during 2025 and beyond, yet a further expansion of financial services and especially the technology platform business could continue contributing an increasingly higher portion of the overall bottom line.
Based on the sell-side forecasts, SoFi is many years away from reaching scale/maturity. Even if the stock’s valuation contracts, this could be more than made up by high earnings growth.
For instance, if by 2026, SoFi’s forward multiple de-rates to 30-40 times earnings, but earnings meet expectations. Even at the low end (30 times 53 cents per share), this could mean a near-doubling for shares compared to today’s prices.
Offering both financial and IT services to the sector, SOFI stock is a fintech play in the full sense of the term. As upside potential vastly exceeds downside risk, feel free to make it a buy.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
