U.S. stocks rallied Wednesday afternoon when the Fed not only maintained the status quo on interest rates, but also signaled three rate cuts next year. SoFi (SOFI) was among the biggest gainers yesterday, as the fintech company’s share rose over 12%.
In fact, SoFi shares have now more than doubled this year, even as they are still below their 2023 highs. Will the stock continue to go up in 2024 as the Fed pivots to a dovish policy stance? We’ll explore this in this article.
What Will the Fed’s Rate Cuts Mean for SoFi?
SoFi believes that it could be among the beneficiaries of the Fed’s rate cuts. During the company’s Q2 2023 earnings call, CEO Anthony Noto said, “We're really excited that when rates start to decline and other banks can't maintain the level of APY that we can, how competitive we can be versus them.”
Noto had made a similar observation during the company’s Q1 earnings call, when he sounded optimistic that SoFi would be able to gain even more market share when rates fall - as its impressive spreads between deposits and personal loans would allow it to offer higher rates on deposits much longer than competitors.
Notably, SoFi received its bank charter as recently as 2022, with the acquisition of Golden Pacific Bank. Before becoming a bank – which gave it access to low-cost customer deposits – SoFi used to borrow from other banks at a much higher rate. The company’s banking license has cleared its path toward profitability, as it has helped SoFi increase its net interest margins. In Q3, it added a record $2.9 billion in deposits, bringing total deposits to $15.7 billion - covering 65% of its loans.
Higher rates on deposits would make perfect business sense for SoFi, as they are still lower than what it would otherwise pay to borrow wholesale. As interest rates fall and SoFi continues to offer higher interest rates on deposits, its deposit franchise will rise and cover more of its loans.
SoFi Stock Could Continue to Go Higher in 2024
While SoFi stock has soared in 2023, it remains below the special purpose acquisition company (SPAC) IPO price of $10, and much lower than its all-time highs. Incidentally, while most other companies that went public through a SPAC merger are nowhere near achieving the financial targets that they provided at the time of the merger, SoFi has delivered on some of its forecasts.
For instance, its 2022 revenues of $1.54 billion were ahead of the $1.5 billion that it predicted before the SPAC merger. Similarly, analysts expect its 2023 revenues to be $2.05 billion which is not far off from what the company predicted in 2021.
While SoFi’s profitability is below what it had predicted back then, management is still optimistic about turning GAAP profitable in Q4 – and while it won't post the $200 million GAAP profit that it had forecast ahead of the merger, it nonetheless signals a move to sustainable profitability.
In Q3, SoFi added around 717,000 new members – a new record that took its total members to nearly 7 million. To put that in perspective, the company had just over 1 million members at the end of Q1 2020. SoFi has been eating away market share from incumbents, which has helped it grow at a fast pace. The resumption of student loan repayments is another positive for SoFi, and it expects that business to grow steadily over the next few quarters.
While analysts expect SoFi’s revenue growth to moderate to around 24% in 2024 – down from the expected growth of over 33% in 2023 – it still offers among the best sustainably profitable growth in the fintech space going forward.
In terms of valuation, SoFi trades at a next 12 months price-to-sales multiple of 3.5x, which - while not mouthwatering - is still reasonable. As SoFi hopefully turns sustainably profitable in 2024, while maintaining its strong membership and revenue growth, the stock should continue to reward investors.
SoFi Stock Forecast
Currently, Wall Street analysts rate SoFi as a “Hold,” and only 5 of the 18 analysts covering the stock rate it as a “Strong Buy.” Its mean target price of $9.25 is just fractionally higher than current levels, although the Street-high target price of $15 indicates expected upside of 63%.
SoFi has grown its top line without compromising on credit quality and profitability. The company has said that its on-balance delinquency rates are less than what they were before the COVID-19 pandemic. It has also somewhat addressed concerns related to the valuation of its personal loan portfolio by selling these at a premium.
I believe that Wall Street is a bit too bearish on SoFi stock. Cathie Wood of ARK Invest, meanwhile, continues to find value in SoFi stock, and has been gradually adding more shares. I am not on the same page with the growth fund manager when it comes to Robinhood (HOOD) - but, like her, I also find SoFi stock a good buy for 2024.
On the date of publication, Mohit Oberoi had a position in: SOFI . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
