Financial services company SoFi Technologies (SOFI) will release its second quarter (Q2) earnings on Tuesday, July 30. Despite performing well and delivering impressive financials over the past several quarters, SoFi stock has experienced a rough ride this year, and is down about 20% year-to-date.
Currently, SoFi has a market cap of $8.29 billion, and its stock has notably underperformed the S&P 500 Index ($SPX). SoFi stock trades approximately 68% below its three-year high of $24.65. This significant decline can be attributed to a prolonged high interest rate environment, concerns over loan originations, and macro uncertainty.
Given this backdrop, the question arises: Is SoFi stock, having lost significant value and trading at a steep discount to its three-year high, a smart buy ahead of its Q2 earnings release? Let's delve deeper into the factors that could influence SoFi's stock performance.
SoFi's Strong Business Momentum Set to Sustain
Despite a challenging macro backdrop, SoFi Technologies has delivered a solid financial performance over the past several quarters. In Q1, SoFi reported a 26% year-over-year increase in adjusted net revenue, marking its 12th consecutive quarter of over 25% growth. Adjusted EBITDA soared by 91% year-over-year to $144 million, with a notable margin expansion to 25% from 16% a year ago.
This momentum in SoFi's business will likely continue in Q2, driven by SoFi’s growing membership base and higher product adoption. In Q1, SoFi’s membership base reached 8.1 million, up 44% year-over-year. Moreover, its members increasingly adopted multiple products. In Q1, SoFi recorded 989,000 new product additions, primarily in its Financial Services segment, reflecting growing member engagement and product penetration.
Additionally, SoFi's strategic focus on diversifying its revenues has been paying off, with the Financial Services and Technology Platform segments contributing meaningfully to the overall top line. While the higher interest rate environment poses short-term challenges for its lending business, the momentum in the Financial Services and Technology Platform segments is expected to continue through Q2 to drive its revenues.
Strong interchange revenue growth within the Financial Services division will support its overall sales. In the meantime, new client additions, large deals, and a focus on monetizing existing clients bode well for the Technology Platform’s revenue growth.
SoFi remains well-capitalized with ample cash and liquidity. Its balance sheet is expected to remain strong, with higher assets. Additionally, a solid deposit base, lower cost of funding, and cost-saving measures will likely cushion its bottom line in Q2.
Long-Term Growth Catalysts for SoFi Stock
While SoFi faces short-term headwinds, it has multiple catalysts to support long-term growth. The continued expansion of its members and product base is expected to fuel top-line growth. Additionally, its focus on improving operating efficiency and achieving sustainable profitability will likely boost its share price over time.
Despite the higher interest rates, SoFi’s personal loan business is expanding, with stringent credit standards ensuring high-quality loan offerings. The company’s commitment to quality loans has resulted in robust credit performance and will likely positively impact its share price. SoFi should also benefit from increased student and home loan originations in the long term, which will diversify its lending revenue base and strengthen its market position.
Management's strategy to diversify its funding sources is another key growth driver. The company has notably increased the proportion of loans funded by high-quality deposits, leading to significant cost savings. This approach reduces reliance on external funding and enhances financial stability and profitability.
A standout area of growth for SoFi is its interchange revenue and technology services. In Q1 2024, interchange revenue surged approximately 65% year-over-year to around $12 million. Although still a smaller component of the overall business, these revenues represent one of SoFi's fastest-growing segments. The lack of credit risk in these operations relative to lending further enhances their attractiveness.
In summary, SoFi's diversified revenue streams and higher product adoption bode well for growth. Furthermore, the company's strong balance sheet and access to lower-cost capital will likely bolster its earnings and drive its share price higher.
Is SoFi Stock a Buy, Sell, or Hold?
Despite a higher-rate environment, SoFi’s customer growth and product adoption remain strong. With shares trading well below their peak price and earnings set to improve in coming years, now might be an opportune time to consider investing in SoFi. However, macroeconomic concerns impacting its loan originations are keeping some analysts from endorsing SoFi stock.
Currently, SoFi has a “Hold” consensus rating on Wall Street. Out of the 18 analysts covering SOFI stock, four rate it as a “Strong Buy,” one recommends a “Moderate Buy,” 10 suggest a “Hold,” and three recommend a “Strong Sell.”
The average price target for SoFi stands at $8.89, indicating a potential upside of about 12% from current levels.
SoFi is well-positioned for long-term growth due to its expanding member and product base, revenue diversification, and commitment to sustainable earnings. However, macro challenges indicate potential short-term volatility for the stock, as reflected in analysts' consensus “Hold” rating.
On the date of publication, Sneha Nahata 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.
