SoFi Technologies (NASDAQ:SOFI) stock is a challenging banking proposition.
The company took away the buildings and most of the people. It has a national banking license but no branches. The business is defined by the net interest margin it can extract from its target market.
Net Interest Margin and Sofi Stock
As I wrote last week, SoFi is a bank wearing the clothes of a fintech. While it advertises itself as a “one-stop shop” for millennials’ money, offering brokerage, Bitcoin, and high-interest checking accounts, it’s mainly in the business of making personal loans.
This becomes clear with a glance at the second quarter earnings report. SoFi’s net interest income doubled between the second quarter of 2022 and 2023. At the end of the period, it reported $18.2 billion as the fair value of its loans.
Most of these are personal loans. These carry high risk and high interest rates. Their value jumped 51% year-over-year. SoFi’s most profitable product is SoFi Money, which delivered over $74 million in interest income during the quarter.
Strip away the cloud and the software and it’s clear that SoFi today is a personal finance company.
Will The Trend Hold?
SoFi is due to report third quarter earnings next week. Traders are expecting SOFI stock to have a loss of 7 cents per share, in line with that second quarter report.
But economic growth surged in the third quarter. Experts insist this won’t last, but they have said the same thing all year. Consumers, in other words, are doing well, including the millennial consumers SoFi serves.
That should mean solid interest income and a fat net interest margin. That margin was 6.36% in the second quarter. If it got a little bigger, or if loan volumes grew a little faster than analysts think, it could mean a big earnings surprise. Maybe even a profit.
That’s what our David Moadel told readers to bet on last week. Based on the latest growth numbers I think it’s a good bet.
Because it is considered a fintech SoFi has been hammered like a fintech. Shares are down 65% from their all-time high.
But if earnings cause analysts to start seeing it as a profitable personal finance outfit, SOFI stock could pop. SoFi’s market cap is just 3.6 times its expected revenue, and present estimates for that revenue may be low.
It’s no JPMorgan Chase (NYSE:JPM), but JPM trades at just 2.5 times expected revenue. If SoFi is both growing and profitable, its price to sales should be close to JPM’s. It could just be getting started.
SoFi stock is a bet on a generation that’s now coming of financial age. It’s the Millennial bank.
The Bottom Line
A lot of people complain and worry about this generation. I’m one of them. But there’s an inevitability to life. The income of young people grows faster than that of older people.
SoFi’s strategy has always been to gain the loyalty of this generation, and of the generation behind it. That’s why they put their name on a sports stadium. It’s what they’re leveraged to.
While it’s possible the economy will blow up, that wars will become intractable, and that the United States could descend into authoritarianism, that’s not the way to bet. SoFi has big advantages in being completely automated, without the burden of a branch network, and available everywhere.
I still see no reason to abandon it.
As of this writing, Dana Blankenhorn had a LONG position in SOFI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter https://danafblankenhorn.substack.com/.