SoFi Technologies‘ (SOFI 2.20%) has demonstrated remarkable business growth since its public debut in 2020. However, its stock performance has not mirrored this success. SoFi’s stock has lagged behind the market, achieving a total return of only 46%, whereas the S&P 500 index has soared with a return of 77%. This persistent underperformance is understandably frustrating for investors who expected more from their investment as the company expanded.
On the flip side, the company’s underlying business has shown significant growth, boasting a staggering cumulative revenue increase of 263%. This positions SoFi among the fastest-growing firms in the public markets since its shares began trading. Given this impressive growth against a backdrop of stock price underperformance, the question arises: Is SoFi a worthwhile investment today? What does the future hold for this fintech disruptor in the next five years? It’s crucial to analyze SoFi’s trajectory to determine whether it deserves a spot in your investment portfolio today.
Boosting User Engagement and Brand Recognition
Originally established in 2011 as a student loan marketplace at Stanford, SoFi has successfully transitioned into a comprehensive mobile application designed to cater to all personal financial needs. The company began with a focus on student loan refinancing but has since broadened its offerings significantly.
The SoFi app now encompasses a wide array of financial services, including banking, investment opportunities, lending products, cryptocurrencies, and even private market investing. This robust service offering, combined with SoFi’s ambitious marketing strategies, has fueled consistent growth in user engagement across its platforms. As of the third quarter, SoFi’s membership reached 9.4 million, a remarkable increase from just 1 million members in Q1 2020, highlighting the effectiveness of its growth strategy.
Looking ahead five years, I anticipate that this growth trajectory will continue to foster increased usage and heightened brand awareness. With over 100 million households in the U.S. available for targeting, SoFi is not just limited to online banking but can provide nearly any financial service a consumer might require. While it’s likely that the astounding growth rates SoFi has seen will eventually taper off due to industry competition, its value proposition continues to resonate strongly with users. I wouldn’t be surprised to see total customer numbers reach 20 million within the next five years.
Diversifying Revenue Streams Beyond Lending
Historically, SoFi’s operations were significantly centered around lending, including student loans, personal loans, and home loans. While the company maintains its presence in this sector today, it is essential for investors to recognize that the company’s loan portfolio is expected to expand as long as SoFi continues to attract customer deposits. As of the third quarter, total loans outstanding reached $25 billion, an increase from $23 billion in Q2 2024.
Concerns regarding SoFi’s loan performance arose due to the company’s rapid growth and status as an unproven lender. However, SoFi has effectively addressed these concerns by presenting credit performance data that reveals its current loans are performing better—indicating fewer defaults—than those from 2017. This encouraging data likely contributed to the stock’s positive movement following the last quarter’s earnings report.
Over the next five years, I foresee a strategic shift within SoFi’s business model, moving away from a primary focus on lending. This transition has already begun, with financial services such as credit card swipe revenue and investment brokerage revenue now accounting for 49% of total revenue, up from 24% in Q1 2021. Both of these segments are experiencing rapid growth, which will enable SoFi to diversify its operations, reducing vulnerability to potential downturns in the lending sector.
Additionally, SoFi’s technology platform, known as Galileo, supports third-party financial institutions in tasks such as digital account setups and managing direct deposits. This high-margin revenue stream generated $100 million last quarter, reflecting a 14% year-over-year growth. The expansion of Galileo and the technology services sector should contribute significantly to SoFi’s earnings growth over the next five years.
SOFI Revenue (TTM) data by YCharts
Projecting SoFi’s Financial Landscape Over the Next Five Years
Predicting SoFi’s financial performance poses challenges due to the complexity of its diverse business segments. The company’s lending operations should be evaluated similar to a bank, utilizing book value and net interest income as primary valuation metrics. In contrast, the other segments, including financial services and technology platforms, would be more accurately valued based on revenue and contribution margin.
To simplify the analysis and evaluate whether SoFi stock is a good investment at current prices, consider that the company generated $2.5 billion in revenue over the last 12 months. Thanks to solid business momentum in attracting users and increasing customer deposits, I believe SoFi’s revenue could potentially double in the next five years, reaching $5 billion. While the company currently struggles with net income, I expect that profit margins will stabilize around 10% or higher as the business matures in the next five years.
This projection would result in annual net earnings of approximately $500 million in five years. Given SoFi’s current market capitalization of $17.7 billion, this scenario presents a price-to-earnings ratio (P/E) of 28 in five years, which is higher than the S&P 500’s current P/E of less than 26. It’s important to note that while SoFi’s revenue might exceed this doubling expectation and net income margins could surpass 10%, even under optimistic forecasts, the stock is likely to trade at a premium earnings multiple five years from now. From my perspective, the stock appears somewhat overvalued at its current levels, and I wouldn’t anticipate significant price appreciation in the next five years.
