This week a group of analysts initiated coverage on SoFi Technologies (NASDAQ: SOFI), stating that the digital financial services firm is a buy as it is a “flywheel of growth opportunity.”
Over the past five days, SoFi shares have jumped almost 9% over the good news reports. But is the coverage warranted?
What is SoFi?
SoFi is a neobank, which is commonly referred to as a challenger bank, much like its rivals Upstart (NASDAQ: UPST) and Marqeta (NASDAQ: MQ). The fintech firm provides a range of financial products and services that include student loan refinancing, mortgages, personal loans, credit cards, investing, and banking through its mobile app and desktop platform.
Why is SoFi stock rising?
Wall Street is backing the stock right now because it has become an industry leader in its space as it offers a broad range of finance products, plus its easy-to-use digital platform and advertising execution have been applauded.
SoFi also has great opportunities to cross-sell its products due to the nature of its business model, or the “flywheel” effect which it is commonly being referred to. The company’s program was built with the intention of cross-selling to its members, which has the potential to result in higher margins. All of which has got investors excited.
Another key metric for SoFi is member growth, which grew 113% year-over-year (YoY) in the second quarter. Therefore, it looks like it is keeping up this performance indicator. In addition, sales jumped 101% to $231.3 million in Q2, and the firm expects over 46% average sales growth through 2025.
SoFi’s banking license
It will be very important for the company to make good on its promise to get a Federal bank charter. Last week, the company announced that Chad Borton, who was previously United Services Automobile Association’s (USAA) bank president, will become its president of SoFi Bank. This news proved to shareholders how confident it is that a bank license is coming.
SoFi is currently regulated in all 50 U.S. states for lending, which means it has to conform with 50 different states’ laws. This takes up a lot of time and effort for the company. However, once SoFi is awarded a banking license, it will be regulated by the Federal Reserve. This will speed things up and help boost its credibility in the competitive fintech space.
In addition, being a bank will allow it to add more loans and mortgages to its portfolio. Another benefit? SoFi will then be able to decide its own rates of interest. There are also options to offer credit cards with business-to-business partnerships, further boosting profitability opportunities.
Is SoFi stock a good investment?
This synergy-based model is likely to continue to boost revenue, profitability, and margins in the long-term which has encouraged analysts to favor the stock.
However, analysts do not expect SoFi to post positive earnings until FY24, which is something to keep in mind. This company is therefore considered as a growth stock and would be a great addition to a diversified portfolio.
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Financial Writer at MyWallSt
Nicole's favorite stock is Etsy because she loves its original and handmade items. She believes people are going to stop buying mass-produced items and start purchasing ‘one of a kind’ fashions and furnishings. In a world of sameness, Etsy has the advantage.