SoFi technologies will they be the next disruptor of FinTech?

Equities in the FinTech sector have performed very well over the past five years. Square is up more than 2.100%, Pay Pal gained nearly 600%, and Visa is up nearly 170% over the past five years, all three beating the returns of the broad S&P 500 Index. Clearly, there are great opportunities in the FinTech sector that investors can take advantage of.

A new fintech share to enter public markets is SoFi Technologies (NASDAQ: SOFI), which officially started operations this year. Is SoFi the next fintech disruptor ready to crush the market?

Image source: Getty Images.

What is SoFi?

SoFi started a decade ago as a way for people to refinance student loans. It’s still in this business, but since then it has expanded its loan offerings to include mortgages, consumer loans, and credit cards. In recent years it has expanded to financial services with SoFi Money (a cash account similar to a bank) and SoFi Invest. Its goal is to make the SoFi mobile application a one-stop-shop for personal finance needs. The app most similar to SoFi is Square’s Cash app, which offers payments, deposits, investments, cryptocurrencies, and debit cards. The SoFi app is trying to solve something similar, but aims to push its product further.

It does this by trying to get approval to operate as an official bank under the federal reserve system. To speed up this process, she bought a small bank called Golden Pacific Bank to get a banking charter. It is still awaiting regulatory approval to fully start its banking business, but if and when it is approved, SoFi will have much more flexibility in using customer deposits to fund loans. This will help its loan and financial services segments operate in tandem.

Finally, SoFi has a technology platform called Galileo which it bought in 2020 for $ 1.2 billion. Galileo provides application programming interfaces (APIs) and software services to help other businesses build digital banking products, easily issue credit cards, and process payments. The rest of SoFi’s business units were already Galileo customers, and SoFi’s management plans to revitalize the business and expand internationally over the next few years.

Financial services and Galileo are growing rapidly

The two most promising areas of SoFi’s business today are Financial Services and Galileo, primarily due to the speed with which these segments are growing.

In the second quarter of this year, SoFi had used 2.6 million financial products, up 243% from the same period in 2020 and up from the measly 107,000 in the first quarter of 2019. It’s clear that SoFi has found a suitable product market for its financial services products, including investing, cash management, and cryptocurrencies. Financial services revenues reached $ 17 million in the last quarter, up significantly from the $ 2.4 million in revenues recorded in the second quarter of last year. With $ 799 million in revenue in the past 12 months, Financial Services is currently only a small part of SoFi’s business, but could become an even bigger growth engine over time.

Another highlight of SoFi’s business at the moment is Galileo, the technology platform discussed above. The platform now powers 79 million accounts worldwide, up 119% year-over-year in the second quarter. The segment has seen 100% year-over-year account growth over the past four quarters, which is a good sign of how well SoFi was able to accommodate the recent acquisition. Galileo is much bigger than Financial Services, making $ 167 million in revenue in the past 12 months and $ 69 million in contributing profits. For a segment where the number of users increases by 100% year on year, a contribution margin of 41% is quite high. If Galileo can maintain these impressive growth figures, SoFi’s $ 1.2 billion acquisition price will look like a steal in a few years because of all the profits Galileo will bring to the business.

Can SoFi justify its rich valuation?

SoFi’s market cap was $ 13.7 billion as of Thursday’s market close, giving it a price-to-sell (P / S) ratio of 17. Its historic lending business is only up 14. % year over year, which is a bit of a concern. for anyone who thinks this is a high growth investment. However, it looks like this slowdown will be picked up by the financial services segments and Galileo, as SoFi targets adjusted net revenue of 58% (which excludes market value changes on loan products) this year. And with just 2.56 million members at the end of Q2, it looks like SoFi has a long way to go to grow if it can achieve national relevance with its app and large portfolio of services. So even at this market cap, SoFi could become a great investment if it can become a digital financial hub for tens of millions of people around the world.

The problem is, right now, it looks like Square (with Cash App) and PayPal (with its flagship app and Venmo) are eating SoFi’s lunch. These three applications consistently rank one, two and three in the finance category on Google and Applemobile app stores, while SoFi ranks outside of the top 50. Even as fast as SoFi is growing, it is still far behind the big dogs in personal finance right now and has a lot of work ahead of it. For example, Square’s Cash app, which offers many similar financial products like debit cards, investments, and personal loans, increased the number of Monthly Active Users (MAUs) by 10 million over the past 12 months. months to 40 million, while SoFi has only had 2.56 million people engage with any of its products in its all company history. If SoFi can achieve significant growth and climb the app rankings, it could be evidence that users see it as a complementary service to Square and PayPal, or that it is advancing against these competitors.

Even though management tells a great story and has a solid product roadmap, I don’t think SoFi Technologies is the next big fintech stock unless it can get closer to Square’s usage and download levels. and PayPal. This could certainly happen if people support SoFi’s full product offering, but at the moment it appears to be lagging behind other personal finance apps when it comes to product adoption. says the majority of consumers are sticking to the more established fintech apps (Cash App, Venmo, and PayPal) for their personal financial needs right now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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