Stocks in the financial sector can be some of the hardest to own. In particular, bank stocks are so highly correlated with the macroeconomy that it can be quite daunting assessing the potential of a good buying opportunity.
One stock that has drastically underperformed both the S&P 500 and Nasdaq Composite so far this year is fintech platform SoFi Technologies (NASDAQ: SOFI).
With shares down roughly 29% in 2024, SoFi investors appear unenthusiastic to say the least. Nevertheless, I think the stock could begin seeing some new life sooner rather than later.
Let’s dig into what’s going on with SoFi’s business and make some connections to how themes in the broader economy could lead to a newfound surge in the stock.
1. The lending business is at a crossroads
SoFi offers a multitude of banking and investment products. The company provides loans to students and businesses, and even offers mortgages for potential homeowners.
Moreover, SoFi can also be used for insurance products, making investments in the stock market, and fulfilling basic needs such as credit cards and checking accounts.
Today, SoFi’s largest source of revenue stems from its lending platform.
The table below illustrates revenue trends in SoFi’s lending segment over the last year.
For the period ending March 31, SoFi recognized $325 million in adjusted net revenue from its lending products — essentially flat year over year.
On the surface, seeing SoFi’s largest source of business stop growing may inspire panic or fear. However, keep in mind that the macroeconomic picture has been pretty cloudy for quite some time.
Inflation has remained stubbornly and abnormally high for nearly two years now. At the same time, the Federal Reserve has implemented a series of interest rate hikes in an effort to curb this inflation.
A high interest rate environment arguably makes it more challenging for consumers and businesses to obtain a loan. Moreover, the average person considering taking out a loan is likely thinking twice before assuming higher-than-usual interest payments.
2. Inflation is cooling, which should help SoFi
The chart below shows the U.S. inflation rate over the last 10 years. While the current rate of 2.97% is nominally higher than the 10-year average, significant progress has been made since peak levels of 9% back in 2022.
One of the biggest talking points surrounding cooling levels of inflation is whether or not the Federal Reserve will decide to reduce interest rates. Economists and Wall Street pundits have spent a good portion of 2024 trying to predict when and how many rate cuts the Fed could implement this year.
While Chairman Jerome Powell and his colleagues have yet to reduce rates this year, the Fed is slotted to meet once again later this month. Although I cannot say for certain, I have a feeling that investors could see at least one rate cut either later this summer or by September.
3. More profits could be on the horizon sooner rather than later
For years, SoFi struggled to generate positive net income. But over the last two quarters, the company surprised investors by posting positive earnings on a generally accepted accounting principles (GAAP) basis.
This is particularly impressive considering SoFi’s largest source of business, lending, didn’t even grow during the first quarter and the company still managed to turn a profit.
To me, the precise timing of a rate cut is less important than the broader themes explored above. The Fed will eventually begin to taper interest rates, and when this happens I think it will be a big catalyst for SoFi — one that could reignite the growth of its lending operation.
An improving economic picture should bode well for the company’s future prospects, especially as it relates to sustained profitability. With shares trading near rock-bottom levels, I think now is a great opportunity to buy the dip in SoFi stock.
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Adam Spatacco has positions in SoFi Technologies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
SoFi Stock Could Be About to Go Parabolic. Here Are 3 Things Smart Investors Should Know. was originally published by The Motley Fool
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