SoFi Stock Is A Buy On Recent Bank Charter Approval (NASDAQ:SOFI)


SoFi Stock Is A Buy On Recent Bank Charter Approval (NASDAQ:SOFI)

Urupong/iStock via Getty Images

Shares of SoFi Technologies (SOFI) trended upwards last week after a company release affirmed that SoFi is receiving a bank charter which signifies a major evolution in the firm’s business. The bank charter could turn out to be a major accelerant for SoFi’s customer and revenue growth, and the digital personal finance company may grow even faster than expected in the foreseeable future!

Why the bank charter is a big deal for SoFi

In a release dated January 18, SoFi informed investors that it received regulatory approval to become a bank. SoFi applied for the charter with the Office of the Comptroller of the Currency back in 2021 and the approval marks an important step in the firm’s evolution from a digital bank to a regulated financial institution.

The bank charter creates an opportunity for the personal finance firm to offer customers lower interest rates which could draw hundreds of thousands of new customers in to SoFi's evolving ecosystem. Additionally, the bank charter may help SoFi create a moat around its lending and financial services businesses which have been key to the firm’s growth in the last two years. SoFi’s customer growth soared during the pandemic and the firm may see more than 3.3M customers by year-end. This growth is in large part due to the firm’s roll-out of new products, especially financial services products such as insurances or investment products. The financial services category has seen the fastest growth in SoFi’s business in the last year and also the highest customer adoption. The bank charter may be an accelerant on this already strong commercial momentum, and lead to even better customer acquisition and improved customer monetization.

SoFi Stock Is A Buy On Recent Bank Charter Approval (NASDAQ:SOFI)

SoFi

Finally, I believe the bank charter could help SoFi differentiate itself from the non-bank FinTech competition. I also believe SoFi is leading a trend in the industry here and more personal finance companies will eventually seek out bank charters to give customers better financing rates and a better service experience. Financial companies with bank charters are under the supervision of regulators, which is costly on one side, but on the other side also signals to prospective customers that their money is protected.

Valuation of SoFi

For FY 2022, SoFi is expected to generate revenues of $1.47B, implying a year over year revenue growth rate of 47%. In the following year, market predictions are for $2.10B in revenues, which calculates to a year over year top line growth rate of 44%. I estimate that the approval of a bank charter could add 5 PP of additional revenue growth on top of these estimates longer term. The bank charter represents a massive upgrade in the perceived value of SoFi and its service offering, and for that reason revenue estimates are likely going to continue to trend upwards.

SoFi Stock Is A Buy On Recent Bank Charter Approval (NASDAQ:SOFI)
Data by YCharts

Based off of $2.1B in revenues for FY 2022, the P-S ratio for SoFi is 5.4 X. SoFi is not profitable so a P-E ratio cannot be used just yet. But growth right now is so much more important than profitability for the firm and I hope SoFi reinvests every dollar it can into the expansion of its platform.

Because SoFi just received the bank charter, which could significantly accelerate customer growth and improve monetization through cheaper funding rates, SoFi may be set for a major re-evaluation. The firm is likely to have added more than 300 thousand new customers to its platform in Q4’21 and will end the year with approximately 3.3M paying customers. I estimate that this customer base will triple to 10M by 2025, with the bank charter approval drawing in another 1M customers over the next four years.

Risks with SoFi

SoFi’s biggest risk, as I see it, is a moderation in top line and customer growth that could have a negative impact on the firm’s sales multiplier factor. The bank charter also allows SoFi to differentiate itself from other non-bank personal finance companies which may help to erect a moat around the firm’s business. The lack of a moat in SoFi’s business has been cited as a potential cause of valuation headwinds in the future, but the bank charter could effectively take the wind out of such sails. Longer term, the challenge for SoFi will be to grow its profitability and maintain considerable revenue momentum.

Final thoughts

The bank charter is really a big deal for SoFi and its customers and the significance is impossible to overstate. SoFi will now be able to offer its customers better interest rates and also, as a regulated bank, the firm and its customers will benefit from deposit insurance provided by the FDIC. The charter legitimizes SoFi’s financial products and lending business and will likely be an accelerant for the firm’s growth!