After a slow start to the year, shares of financial technology company SoFi (SOFI) have risen more than 34% in one month, and crossed above the $10 mark. Further, SOFI has outperformed the S&P 500 Index ($SPX) by a wide margin, as the benchmark gained by 4.2% during the same period.
While SoFi stock has trended higher, let’s delve deeper to understand whether the recent momentum in SoFi stock is likely to continue.
Rate Cuts Are a Boon for SoFi Stock
One of the major catalysts behind SOFI stock's surge is the recent interest rate cut by the Federal Reserve. A half-percentage point cut has provided some much-needed relief for SoFi, which had been facing headwinds due to high interest rates. As interest rates decline, SoFi’s lending business is positioned to thrive. The changing economic landscape will likely accelerate SoFi’s growth rate, as borrowing becomes more attractive for consumers.
Furthermore, SoFi has taken steps to capitalize on the lower rate environment by enhancing its lending platform for small and medium-sized businesses. In addition, the company revamped its home loan division, and now manages its home equity products. This move streamlines operations, and allows SoFi to offer more competitive rates - potentially boosting its revenues significantly.
SoFi is also expanding in key lending markets, including home loans, home equity loans, and purchase loans. These segments offer promising growth opportunities, particularly as interest rates are likely to decline further. By diversifying its lending portfolio, SoFi strengthens its business model for continued growth. This move will help the company to remain resilient in the face of various economic cycles, positioning it to capture more market share across these key areas.
$2B Personal Loan Deal Bolsters Growth
Another significant development came on Oct. 14, when SoFi announced a $2 billion personal loan financing deal with affiliates of Fortress Investment Group. This agreement will expand SoFi’s loan platform business, which connects pre-qualified borrowers with lending partners and originates loans for third parties.
The deal highlights SoFi’s strategy of focusing on less capital-intensive, fee-based revenue sources, which will help the company grow while managing financial risks. The continued strong demand for its loan platform services is a positive sign for SoFi’s long-term growth potential.
SoFi is Poised to Deliver Strong Growth
SoFi's diversified business model should help the company generate strong revenue growth across market cycles. Notably, in the second quarter of 2024, SoFi’s Financial Services and Tech Platform segments experienced 46% growth, and are now contributing 45% of total revenue, up from 38% a year ago. At the same time, the lending division's share of revenue has decreased, showing that SoFi is transitioning to a more balanced and resilient revenue structure.
Furthermore, SoFi continues to grow its member and product base at a healthy pace. For instance, the company added 643,000 new members in Q2, up 41% year-over-year. Product growth has also been strong, driven by SoFi’s cross-selling and upselling strategies. This consistent growth in both members and products — Q2 marked the 20th consecutive quarter of over 30% growth — sets a strong foundation for solid future financial performance.
It’s worth noting that SoFi’s profitability is also rising, with its adjusted EBITDA growing 80% year-over-year in Q2. Additionally, its credit performance is improving, reflecting improved credit quality. Further, with delinquent loan adjustments peaking in March, SoFi is well-positioned to continue scaling its loan portfolio while maintaining strong credit standards.
Additionally, SoFi’s deposit base totaled $23 billion in Q2, up $2.2 billion sequentially. Nearly 90% of SoFi Money deposits come from direct deposit members, known for their high loyalty and retention. This stable customer base provides a low-cost funding source, allowing SoFi to finance a larger portion of its loan portfolio at a lower cost, further boosting profitability.
Conclusion: Can SoFi Sustain Its Momentum?
SoFi’s recent surge above $10 is driven by several positive factors, including favorable shifts in interest rates, a strategic expansion into new lending markets, its $2 billion personal loan financing deal, and strong revenue growth. With its diversified business model, improved credit performance, and growing customer base, SoFi is well-positioned for long-term growth.
Despite the improving operating environment, short-term uncertainties and the recent surge in SoFi's stock price could be among the factors keeping analysts from endorsing the shares. Analysts have a “Hold” consensus rating on SoFi stock.
However, the upcoming Q3 earnings report, set for release on Oct. 29, could be pivotal for SoFi stock. A strong financial performance and solid guidance may prompt analysts to revise their ratings, potentially driving further gains for the stock.
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.
