The Federal Reserve has finally moved to cut interest rates by half a percentage point, a decision aimed at stimulating the economy. This policy shift could be a game-changer for many stocks, especially those that have struggled under high interest rates. One such stock is SoFi (SOFI), a financial technology (fintech) company currently trading below $10, despite its solid financial and operating performance.
SoFi has consistently posted impressive quarterly results, showing significant growth across its member base and product offerings. In its second-quarter earnings report, the company posted record revenue of nearly $600 million, marking a 22% year-over-year increase.
SoFi’s deposit base is also expanding, with 90% of its deposits coming from customers with direct deposit relationships. This signals customer loyalty and strengthens SoFi’s financial foundation. A larger deposit base allows SoFi to finance more of its loan portfolio with low-cost funding, reducing its dependence on external financing and improving profitability.
Thanks to its solid financials, the company even raised its full-year revenue outlook, signaling confidence in its future growth.
However, despite these solid fundamentals, SoFi’s stock price hasn’t reflected this success. It’s down over 17% year-to-date, mainly due to high interest rates, which have squeezed its lending business, a segment that accounts for 57% of its total revenue. Moreover, persistent concerns about a U.S. economic slowdown have weighed on the stock.
The Impact of Lower Interest Rates on SoFi
Lower interest rates could be a game-changer for SoFi, particularly in its lending division. The company’s leadership expressed confidence during the Q2 earnings call, stating that SoFi’s lending business has maintained its strength and generated strong returns despite high rates. Management believes that the company is well-positioned to capitalize on a lower-rate environment quickly.
SoFi has already introduced new capabilities that prepare it for future growth. For instance, it has enhanced its small and medium business lending platform, allowing members to apply for loans and receive offers from lending partners. In the home loans space, SoFi now closes its own home equity products, dramatically increasing its revenue potential per loan. This shift positions SoFi as a principal lender, enabling it to offer more competitive rates to customers.
Once interest rates decline, SoFi expects to benefit from its expansion into three products - home lending, home equity, and purchase loans - as well as the volume already generated by its financing business. This diversification of lending products and SoFi's solid financial foundation could drive a strong rebound in its overall performance.
Diversification and Growth Beyond Lending
SoFi’s growth isn't limited to lending. The company is actively diversifying its revenue streams to reduce its reliance on the capital-intensive lending segment. SoFi also aims to diversify within the lending business. It’s expanding into secured lending products, like home equity loans and student loan refinancing, which offer lower risk than unsecured personal loans.
Additionally, SoFi is evolving into a one-stop shop for financial services, offering products ranging from lending and cards to financial planning and investing. The company’s Financial Services segment has seen strong momentum, driven by product launches and increased customer activity. A highlight is its investment platform, which offers various assets, including private credit and real estate, alongside fractional shares, IPOs, and ETFs. As a result, SoFi’s assets under management (AUM) grew by an impressive 58% year-over-year in Q2.
SoFi is working to lower customer acquisition costs by focusing on cross-selling opportunities. As more users adopt multiple SoFi products, the company expects to gain operating leverage, improving profitability.
The company has also seen strong adoption of its premium membership program, SoFi Plus. Separately, SoFi is innovating in areas like credit cards, expanding its "Buy Now, Pay Later" product, and enhancing its tech platform, which positions the company for sustained growth.
The Bottom Line for Investors
Although SOFI stock has faced headwinds, the combination of a lower interest rate environment and the company’s robust execution across lending and financial services sets the stage for a potential rebound. Investors looking for a growth play in the fintech space should keep an eye on SoFi, as the company appears well-positioned to benefit from the Fed's rate cuts while continuing to diversify its business.
While Wall Street analysts have taken a cautious approach toward SoFi, reflected in the stock's consensus “hold” rating, this sentiment could shift.
As SoFi expands its products and services and leverages lower interest rates, its long-term growth prospects look promising. For those willing to take a calculated risk, SoFi’s current price of under $10 could be a bargain, with substantial upside potential.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
