SoFi (NASDAQ:SOFI), the innovative online personal finance company with remarkable growth potential, has been brutalized lately. The company’s stock price crashed below its post-IPO lows during the recent selloff and is still off by about 70% from its ATH. However, despite the growth scare-induced declines, SoFi’s business remains highly attractive, should continue to expand rapidly, and will likely become increasingly profitable as the company advances. I recently doubled down on my position in SoFi, and the company remains a top growth pick for 2022 and beyond.
SoFi 1-Year Chart
Technically, SoFi’s stock made a bearish double top around $25. Moreover, the second hump occurred during the Nasdaq’s November blowoff top, and it’s been downhill for SoFi ever since. Unfortunately, SoFi is relatively new to public markets, and the company doesn’t have sustainable earnings power yet. Therefore, it was relatively easy to knock the company’s stock down. However, the bottom probably got put in below $8.
SoFi: The Future of Banking
SoFi is arguably the future of finance. With SoFi, you receive access to lending, investing, cryptocurrency trading, banking, credit score monitoring, insurance, and more. Furthermore, many of SoFi’s services are either low cost or no cost, an attractive alternative to more traditional banking/finance options. As we advance, more individuals should take advantage of SoFi’s convenient and low-cost services, which is why the company should continue to grow and expand in future years. Also, SoFi appears to be the leader in its space, which provides the company with the first-mover advantage in the online personal finance space.
SoFi’s Valuation Check
At $9.50 a share, SoFi’s market cap is approximately $7.6 billion. However, when the stock hit a low of around $7.50, the company’s market cap was only about $6 billion. SoFi is a high-growth company that focuses on delivering growth, not earnings, for now. Therefore, we cannot do a traditional price to earnings or PEG ratio analysis. However, we can gauge SoFi’s valuation by looking at its revenue growth, price to sales ratio, and other metrics.
SoFi delivered $1.01 billion in revenues last year, and consensus estimates are for approximately $1.53 billion this year. Therefore, the company should have revenue growth of about 51.5% this year. Revenue growth north of 50% is spectacular, and the company’s robust expansion should continue in future years. Next year’s consensus estimates are for about $2.17 billion in revenues. Moreover, higher-end estimates are for substantially higher revenues of approximately $2.4 billion next year.
When SoFi’s market cap hit around $6 billion, the stock traded at a rock bottom 2.76 times forward sales. SoFi is currently only trading at 3.5 times this year’s consensus sales expectations. This valuation is very cheap as the company’s sales should continue to expand notably in future years, and SoFi should become increasingly profitable in time. Also, if we look at other growth companies with comparable growth projections, SoFi is inexpensive right now.
- Palantir (PLTR), another high-profile growth company, trades at about 13 times forward sales.
- Affirm Holdings (AFRM) trades at approximately 7.5 times 2022 revenue expectations.
- Upstart Holdings (UPST) also trades at around 7.5 times 2022 sales estimates.
- DocuSign (DOCU) trades at about eight times forward sales now.
- The Trade Desk (TTD) trades at about 20 times forward sales.
Due to SoFi’s unique business model, it is not easy to find a close company to compare valuations with. Nevertheless, when we look at comparable high-growth tech services companies with limited earnings, we see that SoFi is relatively cheap now. Even mature technology names with far less growth potential trade at much higher price to sales multiples.
- Microsoft (MSFT) is a mature company with low double-digit growth, but it trades at about 11 times forward sales.
- Netflix (NFLX) declined dramatically due to its growth concerns, and it trades at around 5.5 times forward sales now.
- Nvidia (NVDA) sells at around 18 times forward revenue expectations now.
- After a spectacular drop, PayPal (PYPL) trades at about five times sales, but it is still more expensive than SoFi.
None of these companies have anything close to SoFi’s growth potential, yet they are trading at a higher price to sales multiples. Most companies mentioned here likely have low double-digit and single-digit revenue growth prospects in future years. SoFi will probably eclipse 50% revenue growth this year and should deliver about 40% growth in 2023. Moreover, the company should continue to expand revenues at a significant rate beyond 2023. Furthermore, as SoFi grows in future years, it will likely become increasingly profitable. The current growth and profitability potential dynamic illustrate that SoFi is a strong buy at 3.5 times sales valuation.
Here’s what SoFi’s financials could look like in future years:
|Forward price to sales ratio||5||6||7||7|
While I am not applying overly bullish projections here, we can see that SoFi’s stock price can expand substantially due to its robust revenue growth and modest P/S ratio expansion. Seven times sales is not a very high ratio, as many growth stocks and even mature companies trade at substantially higher ratios. Also, my revenue projections are relatively modest, as I am using consensus 2022/2023 figures and gradually lowering the revenue growth to 25% in 2026. Therefore, it is reasonable to expect substantial stock price appreciation from SoFi in future years.
Risks To SoFi
Naturally, risks exist when dealing with a high potential reward investment. SoFi is a hybrid technology/financial company with potential exposure to loan losses. This dynamic is why we see significant growth at a relatively low price to sales ratio. Also, SoFi faces the risk of increased competition, possibly diminishing its dominance and decreasing its market share. There is also the risk of continued selling pressure due to SoFi’s status as a low profitability growth name. Risks exist and should be weighed carefully before considering an investment in SoFi Technologies.