The $7.5bn market capitalisation is not insubstantial. Does this business, which has reported annual losses for the past few years, deserve such a valuation?

Might it be worth more, meaning the recent fall presents a buying opportunity for my portfolio? The chief executive has been buying SoFi stock over the past couple of months. Ought I to do that?

Why SoFi has been tumbling

SoFi has both fans and critics in the stock market.

It can be seen as an innovative digital bank and financial services provider that is investing now to build a loyal customer base for the future.

But it might also be seen as just one more player in a very crowded marketplace, where legacy banks have put effort into aping the innovations of smaller, nimble fintechs.

The US economy is not looking in great shape to me. There is a risk that it could deteriorate over the coming year. That might push up loan default rates.

That would be bad news for banks in general, including SoFi. But not all listed banks are suffering like it. Bank of America, for example, is up 17% this year, for a 34% gain in the share price over five years.

So I think the SoFi stock fall reflects wider concerns than just those of a recession and its possible implications for default levels.

Mixed recent performance

Partly I think it is because of the mixed picture presented by the company’s performance so far this year.

In the second quarter, there was positive news. SoFi reported its third consecutive quarter of profitability (using the Generally Accepted Accounting Principles or GAAP basis of preparation). Total net revenue was up 20% compared to the prior year period.

Still, diluted net income attributable to shareholders in the quarter was $8m. For a company with a market capitalisation of $7.5bn, that is small beer – though it could be that we see growth from here, explaining the market cap.

What about defaults? The weighted average annual default rate for both personal loans and student loans was unchanged from one year previously.

However, there were some potential warning signs of a deteriorating environment. While personal and student loan default rates were flat, there was an increase in the unpaid balance. That could suggest that borrowers are paying less than before, potentially because their financial situations are getting tighter even if for now they are avoiding default.

Work to be done

On balance, I thought the second quarter, although mixed, was mostly positive for the firm. I reckon its focus on meeting a wide range of financial needs for a specific client type could help it do well in future.

But even after the drop, SoFi does not strike me as a bargain growth stock for my portfolio at its current valuation.

The risks posed by a weak US economy that could get weaker in coming years concern me. Unlike many larger and far older banks, SoFi lacks experience in navigating a US financial crash.

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But whether there may be signs of a recovery, or if the pain may continue, is still up for debate.

What happened?

SoFi burst onto the market in 2021, promising to revolutionise everything from student loans to investing. Led by the charismatic Anthony Noto, a former Twitter exec and sports finance guru, the company painted a picture of a financial utopia where millennials could refinance their student debt and trade while sipping avocado lattes.

For a while, it seemed like the sky was the limit. However, growth isn’t always a one-way street. After bursting through $25, the share price came crashing back to earth with a bang when guidance forecasts disappointed.

The future

Now, with the shares hovering around the $6 mark, the burning question on every investor’s mind is whether this a golden opportunity to snag a future fintech giant at a discount or are we catching a falling knife?

First, the good news: revenue is growing extremely quickly, hitting a whopping $2.24bn in the past year. Analysts are also forecasting earnings growth of 52.32% per year.

However, the firm is still losing money at a concerning rate, with a net loss of $218.8m.

And here’s where it gets really interesting: the firm has less than a year of cash left. In the high-stakes world of growth stocks, something has got to give, which could easily send investors to the exits.

Disruption

To many however, SoFi isn’t just a company; it’s a movement. With a suite of products that reads like a millennial’s financial wish list – from zero-fee trading to crypto wallets – the firm is positioning itself as the one-stop shop for the digital native’s fiscal needs. And in a world where traditional banks are about as popular as a trip to the dentist, that’s a powerful proposition.

The verdict

So, is this a hidden gem waiting to be discovered, or a cautionary tale in the making? The truth, as always, lies somewhere in the middle. For the bold investor with nerves of steel and a taste for disruption, these prices could be like buying Amazon in the early 2000s. The potential upside is enormous, but so is the risk.

On the flip side, the more conservative among us might see this as a classic case of a company that flew too close to the sun. The lack of profitability and dwindling cash reserves are red flags that can’t be ignored. One thing’s for sure – whether the shares soar back to $25 or become a cautionary tale in growth stock history books, it’s going to be interesting. The future of finance is being written before our eyes, and SoFi could be holding the pen – even if it’s running a bit low on ink. I’ll be staying clear for now, but definitely want to keep this one on my watchlist.

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This has been driven by several trading updates that were better than expected. These two companies have recently issued very promising news, giving me another reason to buy. 

A growing fintech

As cost-of-living pressures have increased, it has been a difficult time for fintechs. This has been reflected in the PayPal share price, which has dropped 65% in the past year, and the Visa share price, which has fallen 10%. However, SoFi Technologies (NASDAQ: SOFI), which is one of the newer fintechs, is my favourite pick in the sector. It has fallen 50% in the past year, worse than many other growth stocks. 

The main reason I like SoFi is due to the business’s strong growth in recent times. For example, in the recent Q2 trading update, it said net revenue rose 57% year on year to reach $363m. At the same time, adjusted EBITDA reached $20m, an 81% year-on-year rise. Its total membership also hit 4.3m, a 69% year-on-year increase. This meant the group now expects full-year revenues of over $1.5bn, higher than previously expected. 

Such a resilient performance has been enabled by SoFi’s diverse portfolio, which includes a Lending, Technology and Financial Services Platform. The recent bank charter it obtained has also allowed it to be resilient, despite the recent macroeconomic pressures. 

There are some major risks, of course, including the major fact that SoFi is still loss-making. In the high-inflation environment, where investors are searching for profitable companies, this is an issue. The ‘short’ interest in SoFi is also very high, another bearish sign. 

However, its growth potential is clear to me, as demonstrated by that recent trading update. Therefore, I may add more SoFi shares to my portfolio. 

A growing e-commerce stock

E-commerce has also been struggling post-pandemic. In fact, some e-tail specialists, like Shopify, have been forced to lay off workers. However, MercadoLibre (NASDAQ: MELI), an e-commerce company based in Latin America, has performed far more resiliently. 

Indeed, in its own Q2 trading update, net revenues were up 56.5% year on year to reach $2.6bn. Most impressively, the group recorded income from operations of $250m, with a 9.6% margin. This has left the company with an extremely strong cash position, which should be used for further reinvestment. 

Like with many other growth stocks, there are risks. In particular, MercadoLibre operates in Latin America, which is prone to financial instability. This may disrupt future growth. 

Even so, this has been a factor burdening the company for many decades and, so far, it has continued to post excellent growth every year. I feel that it can continue to do so and I’ll add more MercadoLibre shares to my portfolio. 

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Trading updates

SoFi started life as a public company in a very positive way. Indeed, the company’s price managed to double within just a month, reaching peaks of over $25 at the start of January. However, this meant that SoFi commanded a price-to-sales ratio of around 30, which was considered far too expensive. Considering the difficult macroeconomic environment, the share price has, therefore, sunk since this moment, currently priced at under $6. 

However, its trading updates haven’t shown any signs of problems. In fact, in the most recent quarterly update, net revenues reached $330m, which was a year-on-year increase of 69%. This was far higher than analyst expectations. Furthermore, the company recorded adjusted EBITDA of $9m, which was positive for the seventh straight quarter. Although the firm has not yet reached profitability, this is a sign that it may not be too far away. 

The forward guidance was also reassuring. Indeed, full-year 2022 net revenue is expected to reach over $1.5bn, and adjusted EBITDA should exceed $100m. This highlights that, unlike many other growth stocks, SoFi is still able to perform well in the difficult macroeconomic conditions. 

The risks

Despite these major positives, there are several concerns that I have about SoFi.

Firstly, the student loan moratorium in the US continues to be extended. As one of SoFi’s divisions revolves around student loans, this continues to have a major impact for the firm. However, I believe this factor has been well priced-in. Indeed, management already expects the moratorium to be extended throughout 2022, and this has seen the firm focusing on other divisions. Accordingly, I hope that the diversification of SoFi will mitigate the impacts of this. 

More importantly, I worry about its amount of share-based compensation, which is diluting shareholders’ interests. Indeed, in the first three months of this year, share-based expenses totalled $77m, one of the main reasons for the company’s heavy loss. This is certainly a risk moving forwards. 

What am I doing with this growth stock?

At under $6, I believe that SoFi is now an absolute bargain. In fact, the company now has a forward price-to-sales ratio of just over 3, which is historically low. With revenues growing 69% in the first quarter, and no clear signs of slowing growth, this seems far too cheap. At this price, I’ll continue to add this growth stock to my portfolio. 

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What is the company? 

SoFi Technologies (NASDAQ: SOFI) went public via a SPAC at the end of 2020. Its start as a public company was very strong. In fact, the stock reached highs of nearly $25 in November last year, which was over double its original price. Despite this, the growth stock has now fallen back to below $8, its lowest ever price. This is a 70% decline.

But SoFi has been performing very well. Indeed, in 2021, the company managed to report adjusted net revenues of over $1bn, a 62% rise year-on-year. Further, the company’s members reached nearly 3.5m, an 87% year-on-year rise. This demonstrates that the fintech is growing at incredible rates, and this may be due to its strong business model, which incorporates several different services, including investing and personal loans.

In the same year, SoFi also acquired a bank charter meaning that it will be able to directly lend to customers. This is expected to boost profitability. 

Why has SoFi stock fallen?

Considering its many positives, it may seem odd that SoFi stock has fallen back so heavily. But alongside the general sell-off in growth stocks, SoFi has faced several individual headwinds.

Firstly, President Biden has continued to extend the student loan payment moratorium, most recently until 31 August of this year. SoFi also expects this will be extended beyond August. This will affect SoFi due to its student loan refinancing business, which has operated at less than 50% of pre-Covid levels for the past two years. As such, the fintech has lowered revenue guidance for 2022 by $100m to $1.47bn. Adjusted EBITDA guidance has also been lowered to $100m, from previous estimates of $100m. Despite this, both these figures still represent stellar growth from 2021. Further, the moratorium is only a short-term problem, and as a long-term investor, I am not overly worried. 

SoFi has traded at extremely high valuations, including a forward price-to-sales ratio of around 20 last November. However, at its current valuation it only has a P/S ratio of under 5, far lower than many other growth stocks. Therefore, I no longer view SoFi stock as overvalued.

Why is this growth stock a no-brainer buy? 

I am cautious about buying growth stocks now, due to inflationary issues. But the presence of its lending business, means that SoFi should be able to offset some of these inflationary pressures, as it can lend at higher rates. Further, as evidenced by member growth, it’s a real disruptor in the fintech space. As such, I feel that this dip offers a great time to buy, and I may add more to my portfolio in the next few weeks. 

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But as an investor I take a long-term outlook, and these are two stocks I feel are no-brainer buys right now.

A US fintech stock

SoFi Technologies (NASDAQ: SOFI) went public via a SPAC at the end of 2020 and had an incredible start to life as a public company, reaching around $25 in January 2021. However, the past few months have been far less pretty for the fintech, and it’s currently priced at under $10. For a company with such excellent potential, this seems too cheap.

For example, SoFi is attracting new customers at extraordinary rates. Indeed, in the full year 2021 trading update, it had around 3.5m members, compared to just 1.8m members the year before. Full-year revenues were also able to rise 67% year-on-year to $285m. This demonstrates the excellent growth achieved by SoFi, and I feel this is only the start.  

I was also encouraged by the fact it recently acquired a bank charter, meaning that it will be able to directly lend to customers. This should help offset some of the inflationary pressures, as it will be able to lend at higher interest rates. Accordingly, this should boost future profitability.

Unfortunately, SoFi trades at a fairly high price-to-sales ratio of around 8, and it remains unprofitable. Yet while these are risks, SoFi’s incredible growth is showing no signs of any slow-down, and I continue to believe this growth stock is a long-term buy.

A growth stock with over 100% revenue growth

Sea Limited (NYSE: SE) is another growth stock that piques my interest. Indeed, in the company’s full-year trading update, it reported full-year revenues of $10bn, a 127% year-on-year increase. This was partly due to its strong diversification, which includes the modern e-commerce segment, called Shopee, and its renowned digital entertainment sector, Garena. After recent dips, the company also trades at a price-to-sales ratio of under 7, very cheap for a stock that is growing at such an incredible rate.

Even so, there are slight signs that growth may be slowing. For example, as the pandemic starts to subside, there has been a recent moderation its engagement in the company’s digital entertainment sector. The e-commerce segment also saw revenue growth slow to 90% which, although still incredibly high, was lower than previous quarters.

Losses are also continuing, and in 2021, it reported an adjusted EBITDA loss of $593m. But this is due to the heavy investment into Shopee, which I hope will pay off in the future. Therefore, this is another growth stock I’ll continue to add to my portfolio, as its potential is far too tempting.

The post Forget inflation! 2 no-brainer growth stocks to buy today appeared first on The Motley Fool UK.

Latin American e-commerce giant

MercadoLibre (NASDAQ: MELI) released its Q4 results on Tuesday evening, and it offered further evidence of its incredible growth prospects. For example, the company reported net revenues of $2.1bn in the quarter, which was up 73.9% on a currency-neutral basis, and 60.5% in US dollars. This meant that full-year revenues grew to $7bn, over a 75% increase from last year. The company also has a diversified source of revenues, due to both e-commerce and the fintech segment. Fintech performed especially well in the fourth quarter, with revenues rising to $773m, a 70% increase from last year. As banking penetration in Latin America is still quite low, there is certainly room for more growth. These are all very positive signs in growth stocks.

Despite this, I was slightly disappointed to see a net loss of $46.1m, after being profitable over the past few quarters. This loss was mainly attributable to foreign currency losses — a downside of operating in international markets — and major interest expenses due to the company’s large debt pile. But I’m not overly worried as these seem like short-term problems.

As such, I’ll continue to add MercadoLibre shares to my portfolio, especially as the stock remains below $1,000. This means that it currently trades at a price-to-sales ratio of 7, which is historically low for MercadoLibre and below other growth stocks. For a company with such incredible growth, this seems like a bargain.

Another beaten-down growth stock

SoFi Technologies (NASDAQ: SOFI) is another growth stock that piques my interest. In fact, after reaching highs of around $24 last November, it has since fallen back to just $10. This sell-off now seems overdone for these reasons.

Firstly, the fintech has recently acquired a bank charter, meaning that it will be able to directly lend to customers. This should be a major boost for profitability. Secondly, the bank is growing at incredible rates. Indeed, in the Q3 trading update, it announced that it had 3m members, which was a 96% year-on-year rise.

There are certainly risks with the company, however. For example, despite seeing slower revenue growth than MercadoLibre, it trades at a P/S ratio of 8. This may signal that there is further to fall. Further, I was slightly concerned at its recent acquisition of Technisys in an all-share deal worth $1.1bn. Although it is expected that this will create around $80m in cost savings between 2023 and 2025, I was disappointed to see the share dilution and would have preferred the company to use some debt in the deal. I also feel that the deal may have been slightly expensive.

Even so, I have faith in CEO Anthony Noto and think that SoFi can be a real competitor in the fintech space. Therefore, I may add more SoFi shares to my portfolio at its current price.

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Growth stocks crash

The majority of large fallers have been growth stocks. This is due to worries over inflation, which means that the Fed will introduce several interest rate hikes throughout 2022. The Bank of England has already raised interest rates. This will make it more expensive to borrow, which is particularly detrimental for growth stocks. However, I believe that the stock market crash has left some companies far too cheap, as this issue now seems to be priced in.

One example is SoFi Technologies (NASDAQ: SOFI). SoFi is a fintech that went public via a special purpose acquisition company (SPAC) last year. But despite the share price falling over 50% from its highs of $26, the company’s performance continues to impress me. For instance, in its Q3 trading update, it announced that it had around 3m members, which is a 96% year-on-year rise. Recently, it also received a bank charter, which will allow it to directly lend money to customers. I feel this will entice more customers to use SoFi, while also boosting profitability. Therefore, despite the issues that inflation will cause for the fintech, I think it is a great example of a broken stock but an excellent company. I’m using this mini stock market crash as an opportunity to buy.

The stock market crash doesn’t mean buy everything

Although the stock market crash has led to several bargains, I also believe that some stocks have been rightfully discounted. This means that it’s important to be discerning when picking stocks, especially during such volatility.

For example, Netflix (NASDAQ: NFLX) stock has fallen around 30% over the past couple of days. This has left the stock trading at a price-to-earnings ratio of around 33 which, in comparison to many other growth stocks, does seem relatively cheap. As the shares are now at cheaper valuations than historically, this may allow the shares to recover, especially as some profit growth is still expected for the next financial year.

But I’m slightly worried about its future prospects. Indeed, in its recent Q4 update, there were major signs of slowing subscriber growth. Further, in Q1 next year, Netflix only expects around 2.5m net subscribers, well short of the 4m recruited in the same period last year. This slowing growth is due to the competition in the market, as well as the end of lockdowns around the world. As such, this slowing growth makes Netflix’s valuation hard to justify, and even despite the recent crash, it’s a stock I’m leaving on the sidelines.

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Market leader

PayPal (NASDAQ: PYPL) has gone from strength to strength over the years, with revenues increasing from $10.8bn in 2016 to an expected $25.4bn this year. Over these past five years, the PayPal share price has also managed to rise around 370%. But things have taken a slight downturn recently and over the past six months, the shares have fallen 27%. They’re also down nearly 10% over the past year. This is due to fears that growth is starting to slow amid rising competition.

But while the rising competition is certainly a risk, PayPal is still a market leader in this growing industry. Indeed, in its Q3 trading update, the company still saw year-on-year revenue growth of 13%. It also added 13.3m net new active accounts, demonstrating that customers are still choosing PayPal over other fintechs. A partnership announcement between its subsidiary Venmo and Amazon, is also likely to boost profits when it starts next year.

I equally believe that, like some other fintech stocks, rising inflation is not actually a bad thing for PayPal. In fact, PayPal earns most of its money from taking a percentage of total payment volume on the platform. Therefore, as prices go up, it will also take in more money from these transactions. Accordingly, I’m tempted to add more PayPal shares to my portfolio on the dip.

A new fintech stock to the market

SoFi Technologies (NASDAQ: SOFI) is less well known than PayPal, yet it’s growing at a rapid pace. In fact, in the Q3 trading update, it announced that it had nearly 3m members, a 96% year-on-year increase. It also had net revenues of $277m. This means that FY revenues are expected to total over $1bn, a 60% increase year-on-year. As such, this shows that the company’s growth is rapid, and is the reason why I’m optimistic that SoFi is a real disruptor in the fintech industry. There’s also a high chance that it will be granted a bank charter in the next few months, which should help the company grow revenues at an even quicker pace.

The one concern I have about SoFi is its valuation. Although it’s managed to reach positive adjusted EBITDA, it’s still posting heavy net losses. With a market cap of $14bn, it also has forward price-to-sales ratio of 14, far higher than some other fintech stocks, including PayPal (which has a P/S ratio of under 9) and Square (a ratio of around 8). But SoFi is also seeing quicker growth, and therefore, I’m not overly worried about this high valuation. I may buy more shares for my portfolio.  

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Why am I avoiding S&P 500 stocks?

Due to the excellent performance of the large majority of S&P 500 stocks, valuations now look pricy. In addition, it seems that the market expects the economy to make a full recovery from coronavirus. This means that the S&P 500 currently has an average price-to-earnings ratio of 35, far higher than in previous years. Of course, this is partly due to the number of exciting growth stocks in the index, and it does not necessarily mean that these stocks are going to fall. Nonetheless, it is still an indication that the stocks may be overvalued.  Consequently, any weakness in earnings is likely to be met with a very negative response.

This viewpoint is also shared by others, and the Chief Investment Officer at Morgan Stanley, Mike Wilson, recently stated that he expects the S&P 500 to fall by over 10% in the coming months. This is due to investors currently having over-optimistic expectations. I also feel that this correction may be coming, and this is the reason why I’m not tempted by S&P 500 stocks right now.

The US growth stock I prefer

The fact that I’m avoiding such stocks, does not mean that I’m avoiding US shares altogether. In fact, I believe that there are still a number of opportunities in the US markets, with slightly less established companies. One example is SoFi Technologies (NASDAQ: SOFI), a fintech providing a number of different services, including loan refinancing, mortgages, investing and banking. So, why do I like this growth stock?

After its recent second-quarter trading update, I think that the SoFi share price was unfairly punished. In fact, on the day, it fell 14%, due to the company posting a higher-than-expected loss of $165.3m. But there are a couple of reasons why I think this dip offers the perfect time to buy.

Firstly, revenue managed to rise to $231.3m from $115m last year, and this was higher than analysts were expecting. The company’s member base also grew to 2.6m, up from 1.2m the previous year. These numbers clearly demonstrate growth and give me hope that the company has huge potential for the future.

Secondly, the largest contributors to the loss included stock-based compensation expenses and fair value changes in warrants. Both of these expenses are short term and non-recurring, and this gives me hope that SoFi can reach profitability in the near future. Of course, this is not guaranteed, and the current unprofitability is a risk that requires consideration.

Even so, I am willing to overlook this due to the potential of this business. With a price-to-sales ratio of 12, SoFi also seems more reasonably priced than other fintech companies. Indeed, Robinhood trades with a price-to-sales ratio of over 40. This is why SoFi makes up part of my portfolio, and I’m tempted to buy more at these prices.

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