The banking industry is one of the oldest around, yet it remains one of the largest sectors as everyone requires financial services at some point in their lives. This creates opportunities for innovative companies like SoFi Technologies to carve out a niche. Founded over a decade ago, SoFi has leveraged its tech-enabled platform to achieve tremendous success. Despite this, its shares have been historically disappointing, trading 71% below their peak price from February 2021. Should investors buy, sell, or hold this fintech stock?
SoFi's ability to provide a superior user experience is a compelling reason to buy and hold the stock. The company operates with no physical branches, relying heavily on digital tools to serve its user base. SoFi targets a younger, more affluent demographic, a positive characteristic for reducing credit risk and fostering long-term customer relationships. Growth has been a driving force, with the company rapidly expanding its user base and revenue through strong product innovation and effective marketing. SoFi's deposits grew from $7 billion at the end of 2022 to $23 billion by the end of the last quarter, indicating a robust low-cost funding source.
Additionally, SoFi offers one of the best savings rates, which makes its deposits sticky and increases switching costs for customers. Without the expenses associated with running bank branches, SoFi should theoretically scale profitably as it grows its sales. This is evidenced by three consecutive quarters of positive GAAP net income, signaling a potentially profitable future. Executives project earnings per share (EPS) to reach $0.68 by 2026, up from a forecasted $0.07 to $0.08 this year. Analysts expect EPS to grow between 20% to 25% annually after 2026, which would be significant gains.
Another reason to consider buying SoFi stock is its reasonable valuation. Shares trade at a price-to-sales ratio of 3.1, below the historical average of 4.1. If SoFi's performance continues to impress, this valuation multiple could increase.
However, there are reasons to consider selling SoFi stock. The market might become pessimistic if it believes SoFi's growth will slow down significantly. Critics doubt whether SoFi will meet its EPS growth targets in the coming years. Competitive forces, including major banks aggressively investing in digital capabilities, could also pose challenges. SoFi's balance sheet has shifted, with the business originating $21.3 billion worth of personal loans in the past six quarters compared to just $4.1 billion in student loans. Personal loans are riskier, making SoFi vulnerable in a severe recession that affects borrowers' ability to repay.
Despite these bear arguments, the reasons to buy and hold SoFi stock are more compelling. Adding SoFi to your portfolio appears to be a smart move.
