Financial Services Expansion May Improve Margins, But Overvaluation Risks Persist

Key Takeaways

• SoFi's diversification into non-lending segments aims to boost capital-light revenue streams, enhancing growth and margin potential while reducing balance sheet risk.
  
• Aggressive reinvestment and strategic partnerships may limit short-term margins but target long-term growth, risking overvaluation if expected gains don't materialize soon.
  
• SoFi's strong revenue growth, strategic partnerships, consistent profitability, and brand trust suggest potential for continued earnings improvement, challenging negative share price forecasts.

Catalysts

Provides various financial services in the United States, Latin America, and Canada.

• SoFi has been expanding its non-lending segments and diversifying revenue streams through Financial Services and Technology Platform segments, which are driving a shift towards more capital-light, fee-based revenue sources. This could lead to higher revenue growth in these segments and improve overall net margins due to lower balance sheet risk.
  
• The company is heavily investing in its loan platform business (LPB), which allows it to originate loans on behalf of third-party buyers without holding them on its balance sheet, presenting opportunities for increased fee-based income. However, continued high bond market demand is necessary to maintain this revenue stream and might compress net margins if the demand falters.
  
• SoFi announced future partnerships, such as with the U.S. Department of Treasury and various financial institutions, that promise increased revenue for the Technology Platform. The revenue impact from these deals is anticipated mostly in 2026, implying potential short-term overvaluation due to unrealized earnings until integration is complete.
  
• The company plans to aggressively reinvest its incremental revenue into business growth, which might limit margin expansion in the short term as they prioritize capturing long-term growth opportunities over immediate profitability improvements.
  
• SoFi Plus, its fee-based subscription model, seeks to increase member engagement and revenue per product, but it is primarily available through direct deposit or a subscription fee. The focus on enhancing the value proposition could drive revenue, but the reliance on subscription fees in a competitive market might compress net margins and earnings if value is not perceived as distinct enough.

SoFi Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SoFi Technologies's revenue will grow by 17.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.9% today to 21.7% in 3 years time.
• Analysts expect earnings to reach $922.9 million (and earnings per share of $0.76) by about February 2028, up from $498.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $635 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, down from 34.7x today. This future PE is greater than the current PE for the US Consumer Finance industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 3.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.27%, as per the Simply Wall St company report.

SoFi Technologies Future Earnings Per Share Growth

Risks

• SoFi's strong revenue growth, especially in its Financial Services and Technology Platform segments, could contradict predictions of a future share price decrease. This growth indicates potential for continued revenue increases.
  
• The expansion of SoFi's loan platform business and the strategic partnerships with buyers like Fortress and Blue Owl allow SoFi to serve more members without additional balance sheet risk. As a result, this innovative model could enhance earnings through additional fee-based income.
  
• SoFi's consistent profitability, demonstrated by achieving GAAP profitability and improved EBITDA margins, supports a stronger earnings outlook, counteracting negative share price expectations.
  
• The ability to attract and retain customers, evidenced by significant growth in members and product adoption, suggests a robust brand and consumer trust. This could lead to steady or increased revenue streams over time.
  
• Strategic investments in innovation, such as SoFi Plus and alternative investment options, coupled with partnerships and brand-building efforts, underpin SoFi's potential for improved net margins and revenue, challenging forecasts of share price decline.

Valuation

• The analysts have a consensus price target of $13.29 for SoFi Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $5.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $922.9 million, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $15.78, the analyst's price target of $13.29 is 18.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.