SoFi: Rise of a Fintech Giant and the Question of the Right Exit

The majority of companies that went public through the SPAC route failed to meet expectations or faded into insignificance. However, SoFi is a remarkable exception. The stock price recently reached a record high of over $30, which is three times the original SPAC IPO price. In recent years, analysts were mostly skeptical about SoFi, but the fintech giant impressively proved the doubters wrong, significantly outperforming the market in 2023 and 2024. This success story continues this year, as the stock price has already risen by 90%. As a long-time optimist regarding SoFi, I took advantage of price dips to expand my positions and took profits during rallies. Recently, however, I sold most of my shares. This article highlights why it might make sense to take profits at this level. SoFi combines the robustness of a traditional bank with the innovative power of a fintech. With a banking license, SoFi can cost-effectively use its members’ deposits and reduce its reliance on expensive large-scale borrowings. These funds flow into the company's lending business, which includes personal loans, mortgages, and student loan refinancing. At the same time, SoFi has the flexibility of a fintech and can offer products often denied to traditional banks. A large and growing portion of SoFi’s revenue comes from non-credit-based business segments like cryptocurrency trading. Interestingly, SoFi also generates loans for third parties that do not meet its own credit standards. While this may seem like a complex business model, it is a high-margin, low-risk business with annual loan disbursements of over $9.5 billion and annual revenue of more than half a billion dollars. A key reason to invest in SoFi was its growing ecosystem, which is reflected in a continuous increase in membership. This grew by 34% year-on-year to 11.7 million in the second quarter. Since the first quarter of 2020, the membership number has increased more than tenfold, offering SoFi diverse cross-selling opportunities. SoFi is currently trading above the average price target. The high valuations – such as a price-to-book ratio of 4.79x – are a sticking point for many analysts. However, given its business pivot towards earnings-based income, SoFi deserves a premium compared to traditional banks. Yet, the markets are currently overheated, and a market adjustment could also impact SoFi, as the stock has a high beta. I find the current valuation excessive even considering the long-term earnings potential. Therefore, it is time to consider the bearish perspective more strongly.