SoFi is a personal finance technology (FinTech) company that offers lending, financial services, and financial technologies for card issuing and digital banking. The company is competing to become a winner in a 2 trillion-dollar total addressable market (TAM).
Growth and valuation
In Q3 2021, SoFi reported a revenue of $277 million, up 16.9% from $237 million for Q2 2021, and up 27% from $217 million for Q3 2020. For the next quarter, SoFi guided $272 ~ $282 million (median $277 million), indicating ~52% growth over Q4 2020 ($182 million) or no change over Q3 2021. Q4 seems to be a seasonally weak quarter. See the Q3 2021 presentation here.
Looking at the big picture, SoFi expects to beat the 2021E guidance given in the SPAC IPO presentation and it expected the 2022E revenue to grow by 53% to $1.5 billion. The updated guidance for 2021 is ~$1 billion and thus the price/sales ratio would be ~17. Note that SoFi raised its 2021 full year guidance without much help from student loans due to the pandemic policy. With student loans payments to resume this coming January and a bank charter to be approved in the near-term, SoFi is well positioned to grow at ~50% next year.
If it goes as planned, in 2025, SoFi might be worth $3.669 billion x 15 (P/S ratio) = $55 billion, growing at ~30% in that year. This is about tripple the market capital today.
SoFi had approximately $1 billion in cash, cash equivalent and salable investments. The 2021 full year adjusted EBITDA is anticipated to be postive. The company is in good financial health with enough money to fuel future growth.
SoFi’s competitive advantages/moat
Switching cost: SoFi’s Galileo, sometimes referred to as the AWS of FinTech, provides the underlying infrastructure for FinTech companies. Customers are sticky and it may take a long time to switch to another platform.
Cost advantage: Once the bank charter is approved, the company will have a significant advantage compared to traditional banks and neo banks as SoFi would be able to offer better rates to attract more customers due to the operating cost advantage of its mobile first approach, cross-selling opportunities, and potentially overall lower customer acquisition costs.
Huge TAM: The total addressable market is huge at $2 trillion. There should be a winner in the FinTech space which would take a lion’s share of the market. This winner might just be SoFi. Even if the company comes short, it might still grow to a market capital on the order of 100s of billions.
Market leader: SoFi is leading as an all-in-one/one-stop-shop app. No super app has emerged in North America yet, but SoFi has the potential to be one.
Proven management: CEO Anthony Noto is a proven leader and has done a great job since he took over at SoFi. SoFi’s growth strategy seems to be working well.
SoFi will benefit from resumed student loan payments starting from January 2022. This would roughly add $40 million back to its revenue. When the bank charter gets approved in the near-term, SoFi’s earnings will get a major boost.
SoFi is a high growth FinTech company well positioned to be a winnter in a huge total addressable market. Its share price may triple from today’s price of ~$20/share by 2025 when it would still be growing at ~30%, making a P/S ratio of 15 justifiable. There are catalysts in the short-term to boost its revenue and it could become a large company with a market capital on the order of 100s of billions in the long-term.
Disclosure: I’m long SoFi.