In the past five months, SoFi Technologies has seen its stock price soar by an impressive 148%. While this may appear enticing at first glance, some investment bank analysts are skeptical about whether the company’s core business is growing quickly enough to justify its lofty valuation. What does this mean for investors?

The Evolution of SoFi’s Business Model

Since its founding in 2011, SoFi has demonstrated remarkable adaptability. Initially focused on refinancing student loans, the company faced significant challenges during the 2020 pandemic, when the U.S. federal government implemented a moratorium on student loan repayments. This shift forced SoFi to pivot toward personal loans.

In 2020, SoFi issued $2.6 billion in personal loans compared to $4.9 billion in student loans. Recognizing the need for change, the company redirected its efforts, and by 2023, the volume of personal loans had surged to $13.8 billion — a staggering 430% increase. Meanwhile, the volume of student loans dwindled to $2.6 billion.

A pivotal moment in SoFi’s transformation came in 2022 with the acquisition of Golden Pacific Bank Corp. for $22 million. This acquisition enabled SoFi to evolve from a loan provider to a full-service financial institution. With its newly acquired banking status, SoFi began offering a comprehensive range of banking products, including checking and savings accounts, credit and debit cards, and investment accounts.

A Rapidly Growing Membership Base

SoFi has been expanding its member base by offering a variety of unsecured personal loans. The current U.S. economic environment has created favorable conditions for this business model. The Federal Reserve has already lowered interest rates by 0.75% in 2024, with another 25-basis-point reduction expected on December 18. While lower rates may compress profit margins, increased loan volumes are anticipated to offset this.

In Q3 2024, SoFi’s lending segment reported record revenues and profits, with a year-over-year profit increase of 17% to nearly $239 million. Additionally, borrowers often open checking, savings, and retirement accounts, contributing to a broader ecosystem of financial services. By the third quarter, SoFi’s financial services segment, which began the year in the red, had achieved a profit of $99.8 million.

Another significant advantage for SoFi is its ownership of Galileo, a financial technology platform that automates financial transfers. By utilizing Galileo, SoFi avoids the costs of outsourcing card issuance and payment processing. In Q3 2024, profits from the Galileo platform reached a record $33 million.

Concerns About Valuation

Despite its strong operational performance, some analysts have raised concerns about SoFi’s valuation. Bank of America analyst Mihir Bhatia recently downgraded SoFi’s stock to “underperform,” reiterating a target price of $12 per share — approximately 25% below its current trading price. Bhatia expressed no concerns about SoFi’s core business but argued that the stock’s valuation is excessive.

SoFi’s market capitalization of $17.5 billion is more than four times its tangible book value. Even when using earnings as a valuation metric, the stock appears expensive, trading at over 80 times the estimated 2024 earnings.

Growth Potential and Challenges Ahead

Looking ahead, SoFi forecasts strong growth for 2024, with adjusted net income expected to reach $2.5 billion, representing a 23% year-over-year increase. This is a significant improvement over its initial projection of 16% growth.

The company’s growth prospects were further boosted on October 14, when SoFi announced a $2 billion personal loan platform deal with investment group Fortress. CEO Anthony Noto emphasized that this move aims to diversify SoFi’s revenue streams, focusing on less capital-intensive and more fee-based income sources.

Investor Takeaways

If you had invested $10,000 in SoFi at the beginning of 2023, your position would now be worth $33,770. While these returns are impressive, they are unlikely to be sustainable over the long term. SoFi’s stock is highly volatile, and its biggest growth spurt may already be behind it.

Investors should exercise caution with such stocks and consider their risk tolerance. SoFi’s journey from a student loan refinancer to a full-service financial institution is remarkable, but its current valuation may not justify further aggressive investment.

Fun Fact: SoFi Stadium

Did you know that SoFi owns SoFi Stadium, which opened in September 2020? Home to the NFL’s Los Angeles Rams and Chargers, this state-of-the-art facility can host up to 100,000 attendees and cost approximately $5 billion to construct, making it one of the most expensive stadiums in the world.