2023-10-08 03:49:27 ET
Summary
- SoFi stock has underperformed the S&P 500 since August. Notably, SOFI fell deep into a bear market, down nearly 40% through its recent lows.
- The higher-for-longer Fed is expected to worsen headwinds for SOFI, but I believe pessimism has been baked in.
- The resumption of student loans and the potential normalization of home loan origination could drive SoFi's profitability moving ahead.
- I assessed more constructive buying support for SOFI over the past three weeks. Buyers could be lining up for a more aggressive upward recovery.
- As such, I believe it's time investors look past the hawkish Fed and refocus on SoFI's best-in-class "A+" growth story.
I last updated SoFi Technologies, Inc. ( SOFI ) investors in early August, urging them to continue biding their time, even though I upgraded my rating to Hold. That caution has worked, as SOFI has markedly underperformed the S&P 500 ( SPX ) ( SPY ) since then. Given SOFI's volatility, I believe that investors shouldn't rush into SOFI's surges, which are often astute take-profit zones for sellers.
As such, SOFI has dropped markedly since it surged into its early August highs after its solid second-quarter or FQ2 release in late July. Accordingly, SOFI declined well into a bear market from those levels, down nearly 40% through this week's lows.
Given the steep decline over the past two months, I believe it's opportune to assess whether it's timely for investors looking to buy a growth play in consumer finance, notwithstanding its current lack of a sustainable moat.
With the recent resumptions of student loans, dip buyers could anticipate more robust tailwinds driving refinancing activity levels over the next year. Management updated in an early September conference that it doesn't expect origination levels to recover to pre-COVID levels in the near term. However, it does help to remove a niggling growth impediment, resulting in an over-reliance on personal loans growth to underpin SoFi's near-term profitability push.
However, headwinds on home loans origination have risen recently with the surge in interest rates. Despite that, with the Fed increasingly likely to be at its peak rate hikes, it could provide some semblance of growth normalization in 2024, even though the Fed could remain higher for longer. In other words, headwinds on the home loans business could be peaking over the next twelve months, untethering another growth impediment for SoFi.
SOFI Quant Grades (Seeking Alpha)
Despite that, SoFi's lack of sustainable profitability ("F" grade) is expected to be a significant headwind toward a more robust valuation upgrade. As seen above, SOFI's "D" valuation grade has likely baked in investor optimism on its "A+" growth grade. Notably, SOFI is still more than 50% higher over the past year as investors lifted it from its October 2022 lows.
That said, SOFI is at a pivotal juncture as dip buyers assess whether we could fall into a hard landing, resulting in a further valuation downgrade for SoFi.
Friday's jobs report likely indicates that we aren't expected to fall into a hard landing, corroborating the resilience of the US economy. However, that could send rates higher for longer. Despite that, the market has focused on earnings growth prospects for SoFi, notwithstanding its near-term rate headwinds.
SOFI price chart (weekly) (TradingView)
I haven't gleaned a robust price action signal to give me more confidence about dip buyers returning firmly to support SOFI after its near-40% decline.
However, SOFI has regained its bullish flow, allowing me to anticipate a more robust consolidation zone at the $6.60 to $8 level, underpinning its 50-week moving average or MA (blue line).
Notwithstanding my optimism, SOFI's bullish thesis could be threatened if it fails to hold decisively above the $6.6 zone, as there's a gap toward its May lows at the $4.45 level.
Overseeing these levels is critical to assessing whether SOFI could move further to re-test its August highs ($11.7 level).
Takeaway
I'm leaning increasingly toward the bullish zone, as I don't expect a hard landing, and I believe SoFi's growth headwinds are expected to normalize. As such, the market will likely focus on the company's earnings growth trajectory to justify its premium valuation.
Despite that, my upgrade to Speculative Buy indicates my conviction that SOFI isn't appropriate as a core holding for all investors, given its lack of sustained profitability and moat.
Rating: Upgraded to Speculative Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
We Want To Hear From You
Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!
For further details see:
SoFi Technologies: Growth Story Getting Revitalized - Here's Why I'm Bullish Again