This Digital Bank Could Rally Hard in the Next Bull Market

Financial technology company and digital bank stocks SoFi Technologies (SOFI -5.62%) they have fallen more than 70% from their highs; surely something must be wrong with the business, right? The ongoing student loan freeze hurt the company, but is that a reason to avoid the stock?

Peel back the onion layers and you’ll see that SoFi’s business is arguably stronger than ever, despite share price issues. Here are three reasons why it could be a big winner when investor sentiment towards the market eventually turns positive again.

1. Customers seem to love SoFi’s product

Banking is one of the oldest industries in the world, and traditional banks have ruled that place for centuries. There are more than 11,000 banks and credit unions in the United States, and the largest financial institutions have branches and ATMs in most major towns and cities.

But digital banks like SoFi are constantly changing the game; they do not have the massive network of physical locations that traditional lenders have. Instead, they were born and operate on the internet; Trying out SoFi is as easy as downloading an app on your smartphone. It started in student loan refinancing, so the company exposes itself to students and young professionals, a demographic that typically embraces digital products more than previous generations.

These younger users gravitate towards your platform; the company is adding members rapidly, more than tripling to 4.3 million from the second quarter of 2020 to the second quarter of 2022.

SoFi is growing by taking users from other banks. Investors will want to monitor membership growth each quarter, which still looks strong with a 69% year-over-year increase in the second quarter of this year.

2. A diverse product with cross-selling opportunities

One of the key features of SoFi is its app, which has positioned itself as a one stop shop for all your financial needs. The app offers peer-to-peer payments, direct deposit to multiple accounts, loans, financial education, and more.

For consumers with different applications for their bank, credit card, investment and student loans, SoFi wants to simplify your finances. SoFi even gives members points for doing more in the app, which they can redeem for rewards.

The super app potentially reduces customer acquisition costs, one of the biggest expenses for traditional banks. If customers refinance student loans through SoFi and access the app, they may see the other services it offers: free advertising for the company’s other products.

An ecosystem like this, similar to what Block is doing with its Cash app, it gives SoFi an edge over traditional lenders that operate on a business model that existed before the internet. In other words, it is difficult for them to quickly change and adapt to digital fintech competition.

SoFi’s cross-selling is working, as the numbers show. Membership grew 69% year over year in the second quarter of this year, while the number of products customers have used grew 79%. This happens when members join the app for one product and find others they like once they enter the ecosystem.

3. A wide opportunity for investors

A big winner in the financial industry can be a tremendous long-term investment because the industry offers almost limitless opportunities. According to industry estimates, the global financial services sector is worth around $25 trillion today and could grow to $37 trillion by 2026.

The US population is approximately 335 million and SoFi has only 4.3 million members. That leaves plenty of room to grow in the US and could eventually enter international markets as it becomes more established.

The long-term growth trajectory could last decades if SoFi can keep going and attracting consumers. You don’t need to worry so much about the competition when the cake is big enough to reward multiple winners.

Investors will want to monitor membership and product growth as that is the ultimate indicator of business trajectory. SoFi has a lot of potential, which could mean big investment returns if investors can bear the short-term pain of an irrational market.

justin pope has no position in any of the mentioned stocks. The Motley Fool holds positions and recommends Block, Inc. The Motley Fool has a disclosure policy.

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