Down 79.9%, this growth stock is a screaming buy right now

Sometimes it’s worth looking below the surface. Shares of Sofi Technologies (NASDAQ: SOFI)a company known for refinancing student loans, has been hammered since President Joe Biden tried to wipe out a large chunk of outstanding student loans.

SoFi’s stock is now down 79.9% from its all-time high, set in 2020. But those of us who have paid closer attention to the booming all-digital bank know that its operation Student loan refinancing has become a relatively small part of a growing business that is taking its industry by storm.

SoFi recently reported third quarter results, and they were much better than the stock price suggested. In fact, the company has given investors heaps of reasons to buy the stock now and keep it for the long term. Here are three that stood out the most.

1. Rapid Membership Growth

SoFi’s overall growth is out of this world. The bank added 424,000 new members in the third quarter, bringing its total to 4.7 million, or 61% more than a year earlier.

Unlike many of its fintech peers, SoFi obtained a national banking charter in January. This allows it to fund loan products directly with consumer deposits. Total deposits grew 86% year-over-year to $5 billion at the end of September, and we can expect that figure to continue to grow rapidly. About half of new SoFi Money members become direct depositors within their first 30 days.

To give you an idea of ​​where SoFi deposits could go, consider the oldest digital bank in the industry, Allied Financial. This is the former financial arm of General Motors, and has 2.6 million retail depositors. Despite having 2.1 million fewer depositors than SoFi, total retail deposits at Ally reached $133.9 billion at the end of the third quarter.

2. Business is still booming

Financial services products such as checking accounts and savings accounts are outpacing new lending products. That said, growth in loan products is much stronger than one would expect in the face of rising interest rates. SoFi ended September with 1.3 million loan products, 24% more than a year earlier.

In addition to a consumer banking business, SoFi owns the leading technology platform that fintech companies use to issue and manage their own financial products. At the end of September, its Galileo platform activated 124 million accounts for more than 55 partner platforms. It’s been a bad year for fintech startups, but the number of Galileo-enabled accounts still grew 40% year-over-year in the third quarter.

Image source: Getty Images.

3. Positive cash flow

Fintech companies in high growth stages tend to suffer heavy losses as they try to expand. SoFi seems like a great stock to buy now as it is already generating positive cash flow.

As any traditional bank will tell you, using relatively low interest customer deposits to fund higher interest loan products, such as personal loans, is a lucrative business. In its second full quarter of operations, SoFi’s banking business generated net income of $29 million based on generally accepted accounting principles (GAAP). This equates to a profit margin of 11%. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) more than doubled year over year to $44 million.

Look forward

SoFi shares have fallen sharply, but they are still trading at a fairly high valuation. The recent share price is 40.7 times the midpoint of management’s 2022 Adjusted EBITDA guidance range.

Actual 2019 Real 2020 Actual 2021 Orientation 2022
Adjusted net income $451 million $621 million $1.01 billion Between $1.517 billion and $1.522 billion
Adjusted EBITDA (loss) ($148 million) ($45 million) $30 million Between 115 and 120 million dollars

Data source: SoFi Technologies.

More than 40 times adjusted EBITDA seems like an outrageous multiple for a bank until you consider how quickly SoFi is growing its results. As recently as 2020, the bank didn’t even have a positive Adjusted EBITDA to report.

In the third quarter, the decline in the number of student loans and mortgages was offset by the surge in demand for personal loans. Before you fill your portfolio with SoFi stocks, it’s important to realize that soaring interest rates could also put pressure on SoFi’s personal lending business. This stock is a screaming buy right now as long as you make it a relatively small part of a well diversified wallet.

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Ally is an advertising partner of The Ascent, a Motley Fool Company. Cory Renauer has positions in Ally Financial and SoFi Technologies, Inc. The Motley Fool does not have positions in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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