1 high conviction growth stock down over 70% to buy now
Shortly thereafter SoFi Technologies‘ (SOFI 6.43%) Stock market debut in 2021, the share price has more than doubled. Investors reacted to the financial technology company’s stellar results and its fast-growing retail banking business.
Its performance over the past few years has been nothing short of spectacular, but you wouldn’t tell by looking at the stock chart. Its shares are about 74% below the high water mark they hit last fall.
SoFi’s stock price may have outperformed a bit over the past year, but the company’s business is stronger than ever. That’s why it’s a high-growth stock that you can buy and hold with confidence.
Why SoFi stock has taken a hit
SoFi began a decade ago by being the first company to refinance government and private student loans. Of course, the ongoing pause in student loan payments has put a damper on that business, and it’s unclear how long that will continue. In June, Secretary of Education Miguel Cardona told a Senate subcommittee that President Biden may extend that moratorium on repayments further after the current extension period expires in late August.
Before the pandemic, the company refinanced about $8 billion worth of student loans a year. The possibility that Biden will provide significant debt relief to government student loan borrowers no doubt gives many of them good reason to avoid privatizing those loans and refinancing them.
The market has also penalized SoFi because the company is still in the high-growth, low-profitability stage of its existence and interest rates are rising. And when interest rates rise, the present value of its far-future cash flows falls significantly.
Why SoFi is now a scream buy
A diverse collection of rapidly increasing revenue streams makes SoFi one of the best banking stocks to buy right now. Today, it operates a comprehensive consumer bank through a single smartphone app. At the end of March, it had 3.9 million customers, each using around 1.5 of its products on average.
In February of this year, SoFi became a full-fledged bank with an approved banking charter through its acquisition of Golden Pacific Bancorp. Now it can fund its own lending from customers’ checking and savings accounts, which currently offers depositors interest rates of 1.5% annually .
A banking charter isn’t the only way this company has positioned itself for long-term viability. SoFi also owns and operates Galileo, the company behind the fintech industry’s most valuable application programming interface (API). When new online financial institutions such as Robin Hood or David Open accounts, issue payment cards or run just about any other digital banking service, they use Galileo’s API.
Galileo’s API is also a hit with corporate customers who operate outside of the financial sector but still want to offer branch-specific payment cards to their customers. At the end of March, SoFi’s technology platform enabled 110 million customer accounts, up 58% year over year.
This year, SoFi acquired Technysis, a cloud-based banking platform that online banks use to manage loans, deposits, and other core functions. The combination of Galileo and Technisys has made SoFi the most vertically integrated fintech company ever. This will give it the opportunity to increase its profit margins in ways its competitors can only dream of.
Another internal advantage
SoFi’s proprietary technology stack also includes a successful risk management platform. Instead of paying The beautiful Isaac For a three-digit FICO score, SoFi evaluates potential borrowers based on proprietary algorithms.
Its platform measures a person’s credit risk using far more data points than a FICO score measures. And with a similar approach as upstart‘s SoFi relies on artificial intelligence to improve its risk management. It seems to be working: In the first quarter, the fintech’s personal loan defaults were at a record low.
Unlike Upstart, SoFi gets full visibility as prospective new members progress from application to income verification to approval. With all the data in hand, the company is constantly optimizing the process. Its relatively painless loan application process has fueled its explosive membership growth and upselling of multiple products.
Although Upstart has grown by leaps and bounds, it is already breaking even on a non-GAAP basis. In fact, management expects adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to land in the $100 million to $105 million range this year.
A price that is more than fair
One might expect shares of a bank growing as fast as SoFi to trade at a premium, but that’s not the case. The stock traded at around 1.06 times its book value. This corresponds to the rating of Bank of America and significantly lower than JPMorgan Chase.
There’s no guarantee SoFi will become a leading U.S. bank, but it’s moving in that direction quickly. Investors who buy the stock at its current low have an incredibly good chance of outperforming the market.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Cory Renauer has positions in SoFi Technologies, Inc. and Upstart Holdings, Inc. The Motley Fool has positions in and recommends Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.