As a shareholder of San Francisco-based financial services provider SoFi Technologies, I regret that its shares are trading 44% below their high.
Still, there are reasons why SoFi shares could rise 80% to its previous high of $ 28.
SoFi stock – 4.3% of its free float was sold short at the end of August (33% more than the previous month), according to the the Wall Street newspaper – could increase for three reasons:
- Rapid income growth
- Path to profitability
- Possibility of acquisition
SoFi stocks are risky – especially if they don’t exceed the high expectations contained in Mizuho’s $ 28 price target and increase his forecast when the third quarter earnings release, the stock could crash.
SoFi business and financial results
As I wrote in August, SoFi is a financial services company that was initially known for its student loan refinancing business. SoFi has since added new products including personal loans, credit cards, mortgages, investment accounts, banking, and financial planning. Thanks to its acquisition in 2020 of Galileo
SoFi stock peaked in February 2021 at $ 28.26, according to CNBC, shortly after announcing its merger with Social Capital Hedosophia Corp V – one of several Special Purpose Acquisition Companies (SPACs) made public by Chamath Palihapitiya, a venture capitalist and one of Facebook’s first employees.
SoFi’s second quarter results significantly exceeded revenue growth expectations and fell short of earnings estimates. Revenue rose 101% to $ 231.3 million, 6% more than analysts expected, according to FactSet. Sadly, its net loss of 48 cents per share far exceeds the 6 cents loss FactSet had predicted.
Rapid income growth
My take on stocks in general is that they go up if they beat investors’ expectations both for the last quarter ended and going forward, otherwise stocks go down.
Ambitious growth forecasts are therefore a double-edged sword. If an analyst increases his forecast, the stock may rise in anticipation of the company meeting. However, if the company fails, the drop will be significant.
Earlier this week, Mizuho analyst Dan Dolev wrote that he sees SoFi enjoy 40% average annual revenue growth by 2025.
As the Nasdaq noted, Dolev is considering SoFi to add significant sources of new revenue. Specifically, he sees a transition from a combination of income from mortgages, student and personal loans, to “a full-fledged neo-bank, mobile super-app, with next-generation in-house issuance capabilities.” .
This means that by 2025, Dolev expects services to account for around 60% of SoFi’s revenue while mortgages and loans will drop from 83% to 40% of the total.
Specifically, cash management, trading and brokerage, robo-advisory and crypto services will account for up to 35% of the total and the processing of payments from consumers to merchants will account for an additional 25%. He estimates that mortgage and loan income will make up the balance.
The good news about this change in business mix is that services could grow by up to 150% according to his calculations while mortgages and loans will increase between 20% and 25%.
I think the transition to faster growing services bodes well for the future of SoFi. I would advise management to keep inventing or acquiring new services, as many fintech markets grow rapidly for short periods of time before they start to slow down.
Path to profitability
Unless a business is at risk of running out of cash, investors care more about revenue growth than profitability. For example, Tesla
SoFi still has miles to go before it reaches profitability. In the second quarter, it recorded a net loss of $ 165 million while its operations spent $ 20 million in cash. Fortunately, SoFi’s balance sheet ended the quarter with $ 768 million in cash, giving it time to turn positive.
SoFi’s path to profitability depends on its ability to reduce costs as it grows. To do this, SoFi will make the necessary investments to support new services and then encourage its customers to buy more. In doing so, SoFi will spread its costs over more products – achieving economies of scope – and, through excellent customer service, has the potential to add many new customers – thus spreading its costs over more customers.
As Dolev said, SoFi will encourage “user engagement, fueling a ripple effect of more users taking advantage of SoFi’s multiple services, which generates further growth.” He expects this flywheel to create “operating leverage” as revenues rise – ultimately “cut losses and … generate profits,” according to the Nasdaq.
In the meantime, SoFi is looking for a banking charter that will allow it to accept deposits, which will give it a low-cost source of funds to lend. To that end, SoFi announced in March its merger with Golden Pacific Bank, based in Sacramento.
Stephen Fleming, President and CEO of River City Bank. told Comstock he believed the deal was about SoFi’s ambitions to have a banking charter. About SoFi, he said: “It was just [buying] a banking license.
Mizuho predicts that SoFi will be 3.5 times larger in four years, from $ 800 million to $ 3.7 billion by 2025. His optimistic forecast is for a compound annual growth of 53% in revenue. business at $ 4.4 billion in four years.
He believes SoFi could be profitable by 2024, with its net loss declining to $ 62 million in 2023 and its profitability emerging as early as 2024, the Nasdaq noted.
SoFi could be a buyout target for large financial institutions looking to expand their presence in mobile financial services.
This week, Goldman traded some $ 2.2 billion in stock for buy-now home improvement lender GreenSky. Goldman CEO David Solomon said, “We have made clear our aspiration for Marcus to be the consumer banking platform of the future, and the acquisition of GreenSky advances that goal,” CNBC noted.
Could the acquisition of SoFi also help Salomon achieve his aspiration for Marcus?
The pressure is on SoFi to exceed investor expectations. If this happens, its stock will increase. Otherwise, a big bank could get it back.