A turnaround could be on the horizon for SoFi stock, which has plummeted significantly this year.

On Nov. 1, SoFi Technologies reported revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $424 million and $44.3 million, respectively, ahead of analyst expectations.

A total of 4.7 million members and 7.2 million products were added during the third quarter, bringing the total to 7.2 million members and 424,000 supplementary products.

Particularly considering the economic recession and inflationary pressures facing the fintech sector as a whole, these numbers are impressive. Additionally, SoFi is experiencing low demand for home loans and student loan refinancing because of the ongoing moratorium on student loan payments.

Despite all odds, the company has guided for strong fourth-quarter results and has managed to beat all expectations. Can SoFi now be considered a worthwhile investment?

What Happened?

SoFi recorded $3.5 billion in loan originations in the third quarter, up 2% from a year ago. In contrast, personal loan originations increased 71% year over year to $2.8 billion, while student loans and home loans dropped by over 50%.

In recent quarters, SoFi has increasingly focused on higher-margin personal loans, despite mainly offering student loans before the pandemic. SoFi’s loan portfolio’s overall yield has improved because of this. Additionally, SoFi has attracted high-income borrowers with a weighted average income of $160,000 and a weighted average FICO score of 746, thereby drastically reducing the risk of default. Through its loan products, the company plans to pass on the impact of rising interest rates to customers.

As a result of its national bank charter, SoFi can control its cost of capital in the current inflationary environment. By the end of the third quarter, the fintech had collected $5 billion in direct deposits, up 86% sequentially.

Deposit growth has been remarkably rapid, despite declining deposits at U.S. banks in the same period. In the third quarter, SoFi reported savings of 125 basis points by funding loans with these deposits rather than other funding sources. Despite the current high-interest rate environment, this has allowed the company to earn more profit per loan.

Along with consumer payments, SoFi targets the multibillion-dollar industry of digital B2B payments. After acquiring payment software maker Galileo in 2020 and banking software maker Technisys in 2022, SoFi has become one of the largest third-party infrastructure technology providers for institutional clients.

The company’s revenue and earnings are expected to increase by 35.6% and 75.9%, respectively, next year; however, it is expected to produce positive earnings per share by fiscal 2024.

A forward sales multiple of 3.2 is being applied to the company’s stock. Fintech peers like Upstart Holdings, which trades for 1.8 times forward sales, and Lending Club, which trades for 0.9 times forward sales, both trade for more than seven times forward sales. Despite this, SoFi deserves a premium valuation because it has a robust business model and solid growth expectations.

What’s Next?

The stock price of SoFi has dropped over 66% in the past year. As well as macroeconomic concerns, investors are concerned about the amount the company pays for stock-based compensation (SBC). Even though SBC (paying employees with the company’s equity) aligns their interests with the company’s, it dilutes shareholders’ equity. SoFi generated $235 million in SBC in the first nine months of 2022, up nearly 45% from last year.

Despite this, the company’s fiscal 2022 guidance has been raised three times in a row. As a result, SoFi has a high level of confidence in its business model as well as its execution abilities.

Even after President Joe Biden’s student loan forgiveness plan (the average student loan per borrower is $28,950) has been considered, the expiration of the moratorium on $1.7 trillion in student debt will increase the demand for loan refinancing after January 2023.

Considering the Federal Reserve’s sixth rate hike in 2022, investors might experience some volatility in SoFi stock in the short run. Despite that, I believe retail investors should consider taking a small position in the fintech stock due to the company’s long-term prospects.