This Cathie Wood Favorite is Up Almost 50% in 12 Months
Following a promising earnings report, SoFi stock — a long-term favorite of Cathie Wood — is up 42.57% over the past 12 months.
Introduction
SoFi [SOFI] is a fintech company that began as a social alternative to student loan issuance, but has since broadened out into mortgages, personal loans, employee benefits, investing services and financial services,[1] including a loan platform that connects pre-qualified borrowers to third party lenders.[2]
SoFi was the first US fintech company to raise a $1bn funding round; as such, it is something of a poster child for the theme. This analysis will explore the latest influences on SoFi’s stock, and compare the company’s fundamentals to those of two of its competitors.
Cathie Wood Stops Selling SoFi Stock
As a major disruptor in the field of fintech, it is no surprise that SoFi is a long-time favorite of disruptive tech investor Cathie Wood, Founder and Chief Investment Officer of ARK Invest.
As of November 1, SoFi is the third-largest holding across all of ARK’s ETFs.[3] Wood has, however, held her position in SoFi steady at 13.85 million shares since August 5,[4] when a series of cuts to her position following a buying spree in March came to an end.
SoFi Swings to Profit
SoFi’s stock has gained 14.77% in the year to date and 42.57% over the past 12 months.
On October 29, SoFi released its results for Q3 2024.[5] Combined financial services and tech platform revenue increased 64% year-over-year to account for 49% of total adjusted net revenue, which itself increased 30% year-over-year to $697.12m.
Earnings swung from a loss of $0.29 in the same period the previous year to a profit of $0.05 per share, beating analyst estimates by 25%.[6]
However, SoFi’s share price was little impacted by the strong results, closing the week 1.34% below their pre-earnings price. Given its year-to-date gains, have investors already priced earnings beats into SoFi’s valuation?
Comparing Loan Providers
Two of SoFi’s key competitors are Qifu Technology [QFIN] and Ally Financial [ALLY].
Qifu Technology is a Chinese company with shares listed on both the Nasdaq and the Hong Kong stock exchange. It provides software to help lenders and borrowers across the loan lifecycle, including borrower acquisition, preliminary credit assessment, fund matching and post-facilitation services.[7]
Ally Financial is a fintech company that offers automotive finance, insurance, mortgage and corporate finance services.[8]
SoFi’s shares are expensive compared to Qifu and Ally, relative to their respective trailing sales. However, it is projected to post substantially stronger revenue growth over this year and the next.
SoFi Stock: The Investment Case
The Bull Case for SoFi
SoFi’s revenue mix is shifting away from its more capital-intensive lending arm, and towards financial services and technology.[9] Its financial services segment, in particular, more than doubled its revenue in Q3.
Furthermore, its loan platform segment grew revenue by five times,[10] to $55.6m, based on fees on over $1bn of loans generated for third parties. This revenue is independent of interest rates; with the Federal Reserve having begun a rate cut cycle in September, this segment could grow at an even faster pace, as low interest rates encourage greater borrowing, without the concomitant drop in interest payments that SoFi’s – and its competitors’ – traditional loan business will suffer.
At Goldman Sachs’ Communicopia and Technology Conference, CEO Anthony Noto made the point that the combination of a stable US economy and falling interest rates is not something that has occurred since SoFi’s founding, but that could be “positive for all of our businesses”. [11]
Of course, a degree of uncertainty now applies in light of the recent election result, with many expecting Donald Trump’s victory to lead to a new rise in interest rates.
The Bear Case for SoFi
SoFi looks as though it is about to post its first profitable financial year on a non-GAAP basis, but the profits it is expected to turn are small compared to its current valuation.
It has a trailing P/E of 95.17, which is high, but that is understandable in a company that is only recently profitable. However, its forward P/E of 54.35 is incredibly high for this metric. The Nasdaq 100 — which is not renowned for its reasonable valuations — has an average forward P/E of 31.82, while the equivalent figure for the S&P 500 is 24.49.[12]
In other words, one strong earnings report is all well and good, but SoFi will have to continue delivering and growing consistently in order to meet investor expectations.
Analysts are, on the whole, bearish about SoFi’s prospects. The median price target among analysts polled by LSEG of $10.50[13] implies an 8.1% decline over the next 12 months. The most pessimistic target, of $4.00, envisages the stock falling 65.0% during that period.
Conclusion
While SoFi could be about to enter a favorable macroeconomic environment, its share price is already elevated compared to its fundamental performance metrics. Investors should consider the risks involved in the stock and conduct thorough research before taking an investment decision.
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[1] https://www.sofi.com/our-story/
[2] https://fstech.co.uk/fst/Sofi_inks_2_billion_deal_to_expand_loan_platform_business.php
[3] https://cathiesark.com/ark-funds-combined/complete-holdings
[4] https://cathiesark.com/ark-combined-holdings-of-sofi
[5] https://s27.q4cdn.com/749715820/files/doc_financials/2024/q3/Q3-2024-Earnings-Release.pdf
[6] https://markets.ft.com/data/equities/tearsheet/forecasts?s=SOFI:NSQ
[7] https://www.bloomberg.com/profile/company/QFIN:US?sref=AaLF1RVh
[8] https://www.forbes.com/companies/ally-financial/
[9] https://seekingalpha.com/article/4730535-sofi-customary-earnings-dip-a-buying-opportunity
[10] https://s27.q4cdn.com/749715820/files/doc_financials/2024/q3/Q3-2024-Earnings-Release.pdf
[11] https://seekingalpha.com/article/4720038-sofi-technologies-inc-sofi-goldman-sachs-communacopia-and-technology-conference-2024#hasComeFromMpArticle=true
[12] https://www.wsj.com/market-data/stocks/peyields
[13] https://markets.ft.com/data/equities/tearsheet/forecasts?s=SOFI:NSQ