SoFi Technologies Stock: Banking Charter Approval and Implications (NASDAQ: SOFI)
SoFi Technologies (SOFI) has taken a huge hit. Currently, investors are selling high-growth names at all costs, and SoFi has not been spared.
As the stock continues to sell off, investor concerns continue to mount. Here, I discuss both the bearish and bullish cases, while noting that the risk-reward ratio of investing in SoFi Technologies is now very compelling.
Investment sentiment against SoFi Stock
The past year has been brutal for SoFi shareholders. As you can see above, this stock has been very volatile, hitting investors around the world over the past year.
In fact, as it stands, anyone who invests in SoFi is holding onto a loss as the stock continues to head for all-time lows day after day. This has dramatic implications for shareholders. This implies that anyone who owns SoFi shares has nothing but regrets.
That being said, fundamentally the company continues to perform well.
Revenue growth rates are accelerating again
As you can see above, forecasts for the fourth quarter of 2021 indicate that SoFi will revive its revenue growth rates to 55% year-on-year. This is important in two respects.
First, let’s see the context. SoFi has seen its revenue growth rates slow steadily and rapidly over the past 4 quarters. Therefore, these Q4 forecasts show that SoFi has even more upside in the business.
Second, what is particularly remarkable is that the fourth quarter of 2020 saw such high revenue growth rates of 168%. As a result, whenever SoFi came up against this, it was setting itself up for a tough comparison.
With this in mind, the fact that SoFi is able to guide its revenue growth rate in the fourth quarter of 2021 towards the top of its range, up 55% year-on-year, reassures investors in this period of market turbulence. fact that SoFi is indeed still rapidly growing.
Why invest in SoFi now?
SoFi has 3 different business segments.
Over the next few years, SoFi should see a dramatic acceleration in its fintech branch. This is where most of the bullish thesis points as justification for its valuation.
In the meantime, there remains the outstanding question of whether or not SoFi will obtain approval for its banking charter.
However, I believe this could actually be a double-edged sword, with both positive and negative considerations.
First, I will discuss the positive consideration, then the negative.
The great uncertainty, the profit margins discussed
As I’ve pointed out before, regardless of future growth rates and potential for SoFi, bearish investors continue to note that SoFi is too unprofitable to support its valuation.
As it stands, as we look to the end of this year, SoFi expects a base-case scenario of around $254 million in non-GAAP adjusted EBITDA. This implies that investors should see its EBITDA line increase nearly 10x over the next twelve months.
And note that this adjusted EBITDA forecast assumes that SoFi does not obtain bank charter approval to pass.
Now let’s talk about the negative consideration.
SOFI Share Valuation – Cheap Price
Here too, there are two sides of the argument that overlook the stock.
If SoFi gains bank charter approval, its adjusted EBITDA profile will explode higher:
That would put the stock currently trading at around 23 times this year’s EBITDA. That’s not bad at all, considering many stocks are still priced at 23 times this year’s earnings!
Yet on one side of the equation, investors point out that SoFi’s balance sheet is already somewhat stretched:
As you can see above, in Q3 2021, SoFi holds $2.8 billion in debt. Even if we remove the $500 million in cash, you still end up with a balance sheet that contains over $2 billion in net debt.
However, if SoFi does eventually get the bank charter approval needed to reach the expected $450 million in EBITDA, then, in that case, its balance sheet will become significantly smaller.
Since SoFi will have to comply with Federal Reserve regulations as a bank holding company, this means that the amount of restricted cash SoFi will have to hold will increase significantly, reducing its ability to be lightweight in the future.
All of this will have a significant impact on the multiple that investors will be willing to pay for this stock.
In summary, the stock is priced low at 24 times this year’s EBITDA, should SoFi get charter approval. However, as I note, if SoFi gets charter approval, it will have to put in place many more restrictions on its balance sheet, which will impact its ability to be nimble and opportunistic going forward.
So even though 24x EBITDA is very cheap for a fintech stock, if the investment community starts to view SoFi as more representative of a traditional bank, the multiple that investors will be willing to pay for the stock would compress. .
On the other hand, much of what I have discussed here is familiar to most investors. And given that the company continues on the same path as before, the only difference is that the stock is trading at historically low levels, the risk-reward profile is arguably the best it has been in recent times.
Indeed, just a few months ago, the stock price was almost 40% higher. So nothing has really changed, it’s just that investors have the ability to slowly incorporate the average dollar cost into their holdings.