SoFi Technologies (NASDAQ: SOFI) has been in the news recently, and for valid reasons. The stock has jumped 16% in just a week, reaching a new 52-week high of $18. What is fueling this momentum, and is there additional potential for growth?
The recent surge is due to SoFi’s announcement regarding the return of cryptocurrency investments on their platform later this year. This is not solely about providing crypto trading – the firm intends to utilize blockchain technology for quick international money transfers, placing itself at the crossroads of traditional finance and digital assets. The market’s response has been overwhelmingly favorable, and it is easy to understand why. Crypto services could emerge as a notable revenue generator, especially as digital assets continue to achieve widespread acceptance. Nevertheless, if you prefer an upside with a more stable experience than an individual stock, think about the High Quality portfolio, which has surpassed the S&P, and achieved over 91% returns since its inception. Additionally, check out – What’s Happening With WOLF Stock?
Strong Revenue Growth
SoFi’s financial performance has been remarkable, particularly in comparison to broader market indices:
- Three-Year Performance: Average annual revenue growth of 36.2% (versus 5.5% for the S&P 500)
- Last 12 months: Revenue increased by 25.9% from $2.2 billion to $2.8 billion
- Most recent quarter: 31.7% growth to $772 million from $586 million year-over-year
These figures present a compelling growth narrative that greatly surpasses the overall market.
The Bigger Picture: Looking Ahead to 2027
Here’s where the investment perspective becomes intriguing. We anticipate SoFi’s revenues will expand by approximately 21% annually, surpassing $5 billion by 2027 – essentially doubling from the estimated $2.6 billion in 2024.
However, here’s the catch: these estimates do not even include the prospective boost from the new cryptocurrency offerings. To provide perspective, Robinhood generated $626 million in crypto trading revenue in 2024 with around 24 million users. With SoFi’s 8.5 million members and a generally higher net worth customer base, capturing even a small portion of Robinhood’s per-user crypto revenue could contribute an additional $150-300 million per year to SoFi’s revenue within just a few years. This indicates that actual growth could significantly exceed current projections.
Valuation: The 80% Upside Scenario
Currently priced at $18, SoFi has a price-to-sales ratio of 7.3x based on the trailing twelve-month revenue. This is slightly above its four-year average of 5.5x, reflecting growing optimism about crypto services and potential improvements in interest rates.
Let’s break down the math on the upside potential:
Now, if SoFi’s revenues increase 2.5 times over the next three years (better than the forecasted 2 times), the P/S multiple will reduce to 3.1x from its current level, assuming the stock price remains constant, correct? But that’s what SOFI’s investors are banking on not occurring! If revenues expand 2.5 times over the coming years, instead of the P/S declining from around 7.3x presently to about 3.1x, a scenario where the P/S metric contracts more gently, perhaps to around 5.5x, appears more viable (within the typical fintech range of 4x-7x and SOFI stock’s own historical norm).
At 5.5x price-to-sales, SoFi’s share price would climb to approximately $33, representing an 80% increase from current levels. The reasoning is simple: as revenues rise significantly, even if the valuation multiple compresses slightly, the absolute stock price should experience a notable ascent.
Risks to Consider
Before getting too enthusiastic about the potential upside, let’s discuss the important risks.
- Interest Rate Sensitivity: Being a bank, SoFi’s profitability is closely linked to fluctuations in interest rates. If rates do not decrease as anticipated, profit margins may come under pressure.
- Intense Competition: The fintech industry is crowded with both traditional banks and innovative startups vying for market share. SoFi must consistently bring new ideas to the table to sustain its advantage.
- Valuation Multiple Risk: Some investors may contend that SoFi ought to be valued more like a traditional bank (2x-3x revenue) rather than a high-growth fintech entity, which could restrain multiple expansion.
- Market Volatility Concerns: Historically, SoFi has shown greater volatility compared to the broader market during downturns:
- 2022 inflation shock: SOFI fell 83.3% versus the S&P 500’s 25.4% decline
- 2021 COVID-19 correction: SOFI decreased by 46.7% while the S&P 500 fell 33.9%
This pattern of volatility indicates the stock could experience significant challenges during periods of market stress.
The Bottom Line
SoFi offers an appealing investment opportunity with a legitimate 80% upside potential, propelled by strong revenue growth and the forthcoming launch of its crypto platform. The company’s history of outperforming market growth rates is noteworthy, and the integration of cryptocurrency could speed up this trend. However, investors should be fully aware of the associated risks. Sensitivity to interest rates, competitive pressures, and the stock’s tendency for increased volatility during market downturns are genuine concerns that could affect returns.
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