SoFi: The Chipotle Of Fintech? (NASDAQ:SOFI)
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My bullishness of SoFi (NASDAQ:SOFI) is underlined by two facts. First, SoFi is cheap. This is on the basis of the current low forward price to sales multiple of 3.8x despite expected compound annual earnings growth for the next three years up until the financial year 2025 set to be at least 34%. This is not a mature firm facing anemic or sub-zero year-over-year growth rates, but a fast-growing fintech company that just etched 50% growth for its last reported quarter with membership growth of nearly 70%.
The second fact is that SoFi has a dominant position in the student loan refinancing market. This has long been held back by the now lifted repayment freeze for student loans. While SoFi is more than just a student loan refinancing company, the impact of the launch of long-paused loan repayments will be multi-faceted, but will largely revolve around supercharging SoFi’s flywheels and helping grow the company’s membership. To put this another way, the break discouraged a total of millions of students from refinancing their loans in the two and a half years since it was implemented. Since SoFi has a leading position in this market, membership growth has been limited. The current membership of 4.3 million would be much higher if the moratorium had not been implemented.
The impact of a return to normality was highlighted by the 5.7% month-on-month increase in visits to Sofi.com in August as some students move to get ahead of loan repayments.
Similar web
This is clearly the time for the company to put the accelerator on new marketing spending that management started with a new campaign featuring the Los Angeles Chargers quarterback. Overall, a former core part of SoFi is returning and will be an important catalyst. The moratorium has been in place for a long time. The US has since had two presidents, the pandemic has come and gone with stay-at-home orders now a distant memory, and inflation has risen to multi-decade highs. The potential volume of new users to the platform will drive a significant uptake of products. This will include the banking service that brings in cheap retail deposits and helps differentiate SoFi from other fintech competition.
Bears would be correct in saying that there are many other players in the area and that the forgiveness of up to $20,000 for some students would reduce the total volume of loans to be refinanced.
A clear path to 10 million members opens up
The comparison with a chain of fast-casual restaurants may seem strange. Chipotle (CMG) is a highly dominant company in its niche that underwent an almost existential accounting that forced management to constantly innovate to prevent an eternal slide into the abyss. SoFi’s largest and most dominant business function was turned into political theatre. The reality of the moratorium has still seen continued income growth on the back of new businesses and operational gains that have transformed the composition of the business. The 2020 acquisition of Galileo was followed up two years later by the acquisition of Technisys with a banking license in tow.
| Year | Members | Annual % growth |
| 2021 (Ac) | 3,460,000 | 87% |
| 2022 (estimated) | 5,000,000 | 44.5% |
| 2023 (estimated) | 7,100,000 | 42% |
| 2024 (estimated) | 10,082,000 | 42% |
These estimates do not account for the potential impact that the end of the student loan moratorium will have. I would assume that, at a minimum, it will see year-on-year growth stay above 50% for the next three financial years. This contextualizes the current low PS ratio. Again, it would be correct to say that a recession would set these growth rates back significantly and give the business model further headwinds. Flagging the risk to some of their lending segments from higher interest rates would also be appropriate. The company has a diverse set of businesses, some of which do well in a low-price environment, but some of which perform just as much better in a high-price environment.
Down, but certainly not out
Softbank is also close to, if not quite finished offloading its stake in SoFi, the use of digital financial services continues to rise in the US, and sentiment appears to have reached a floor. I remain bullish on SoFi and have extended my targeted full position with continued buying in the $5 to $7 range.
Although it’s cliche, the old adage about buying when there’s blood in the streets rings true here. SoFi’s long-term future looks bright as continued membership growth and a low PS multiple increase the propensity for significant alpha in the years following the end of the current inflation-induced malady. Current investor sentiment has fallen too much, not just against historical multiples for near-profitable companies growing at 50% year-over-year, but against expected future growth. This will return at some point in the future, I’m just not sure if it’s in 2023 or beyond.
