SoFi Technologies Stock: Great Truck Loader Opportunity (Rating Upgrade)
Sofi Technologies (NASDAQ:SOFI) Buyers have been trying to hit the bottom over the past two weeks since the Q3 or strong Q3 earnings release. It is a pivotal level that buyers must defend. If this level fails, buyers may need to To prepare for more pain, suggesting that a return to the May 2023 SOFI lows ($4.50 level) may be possible.
Despite my caution, I’m confident that the worst for SOFI is likely over, although market reaction to SoFi’s earnings scorecard has been somewhat tepid since its initial rally.
Investors should remember that the digital consumer finance company posted a strong third-quarter beat and raised guidance for FY23. The company is also confident of achieving GAAP net income profitability in the fourth quarter, marking an important milestone toward its long-term model.
At a recent conference in November, management reminded investors of the expansion SoFi’s revenue and profitability growth since FY24. While the lending segment remains the driver of near-term profitability growth, SoFi expects the financial services segment to play a more prominent role as it reported positive contribution earnings in the third quarter.
Accordingly, SoFi’s financial services segment reported contributed earnings of approximately $3.26 million in the third quarter, significantly higher than last year’s loss of $52.6 million. The company expects operating leverage to continue to grow in this sector, driven by a high-quality deposit base, supported primarily by direct deposits. “Growth in total deposits is driven by 90% of direct deposit members, with 98% of deposits fully insured by the FDIC,” SoFi emphasized.
Its customer base has clearly benefited from the high APY (4.6%) offered to direct deposit customers. It helps SoFi open the door to cross-selling across its financial services spectrum, as the company aims to be a leading one-stop shop in its field.
Additionally, the company’s ability to continue to drive loan growth through its notable deposit growth (which reached $15.7 billion in the third quarter) allowed it to benefit from higher net interest income. Committed investors should remember that the lending segment’s net interest income grew by 90%, which helped drive 16% growth in the segment’s net revenue.
With the resumption of student loans driving origination volumes (up 101% year-over-year), the headwinds against SoFi’s recovery are likely to subside in the long term, as we are not expected to fall into a recession.
Furthermore, by having a healthy deposit franchise, SoFi proved its mettle during the regional banking crisis earlier this year. While there have been concerns about whether it can discharge its loans, management is not unduly concerned. The recent securitization deal with BlackRock (BLK) underscores management’s confidence in the high quality of SoFi’s personal loan sector.
Therefore, I assess that the market appears increasingly confident about a further recovery in SOFI, although patience is needed, given the recent market volatility.
SOFI buyers are trying to defend the $6.50 to $6.60 area, which was formed in the week before Q3 earnings. The bulls should hold this area, as there is a huge gap towards the May 2023 lows ($4.50 level). This gap is due to the large rally between the May 2023 lows and the early June 2023 highs. In other words, dip buyers could consider taking profits quickly if they anticipate that the $6.50 SOFI area is not expected to hold, triggering a sell-off Potentially sharp artistry.
Despite this caution, I’m confident that SoFi’s strong operating performance has provided greater credibility for investors looking to invest in a high-growth digital finance company. While pessimistic investors could argue there is no sustainable moat, SOFI has outperformed its financial sector peers (XLF) since late 2022. It has also demonstrated the resilience of its deposit franchise, suggesting it has a stable and loyal direct deposit base that it can rely on. On it to depend.
With this in mind, I urge investors to look forward (not back), as the company is still in the early stages of achieving its long-term EBITDA margin target of 30%.
Rating: Upgraded to Strong Buy.
IMPORTANT NOTE: Investors are reminded to conduct due diligence and not to rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to indicate a specific entry/exit time at the time of writing unless otherwise stated.
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