From a bird’s eye view, SoFi Technologies (NASDAQ:SOFI) is easily one of the most relevant names in the public equities market, leveraging its fintech solutions to democratize financial access for a new generation. As a result, many bought into SOFI stock, which debuted as a merger with a special purpose acquisition company (SPAC).
Of course, as has been common with SPACs over the trailing year, the ride hasn’t always been smooth. To be fair, SOFI stock is up 26% year-to-date, which is simply excellent. At the same time, shares are down nearly 17% over the trailing month, reflecting concerns about the underlying company’s recent financial results.
Nevertheless, our own Dana Blankenhorn reminded readers that — despite many concerns that he acknowledges — SOFI stock benefits from a potentially lucrative longer-term outlook. Primarily, Blankenhorn argues that Galileo, a banking-centric application program interface (API) that SoFi acquired last year, expands the fintech firm’s business coverage.
As Blankenhorn wrote, “APIs make their makers into their industry’s hub. Everything else is a spoke. The API defines which new features all players can offer. They’re the control point.”
Undoubtedly, it’s a powerful argument. SoFi has features that are similar to neobanks or online-exclusive financial service platforms. By leveraging connectivity technologies — such as communication APIs — the company can reach out to digitally fluent young consumers as well as democratize access to financial tools for demographics that historically were underserved.
In terms of moral victories, SOFI stock is taking a lap around the bases. But in addition, Blankenhorn points out that the issuing company also enjoys a strong team. You have a proven leader in CEO Anthony Noto. Also, SoFi hired Derek White, who previously ran Google’s financial services cloud platform.
Therefore, if you’re patient, SOFI’s recent volatility could be a buying opportunity.
Why Skepticism Still Clouds SOFI Stock
Although management has an opportunity to right the ship, prospective buyers of SOFI stock should know that the recovery storyline is not guaranteed. For one thing, the concept of strong backing hasn’t always panned out.
For instance, consider the case of Paysafe (NYSE:PSFE). When analysts were assessing the potential of this former SPAC play, many noted confidence in veteran investor Bill Foley, who backed the payments platform.
Additionally, Paysafe benefited from broadly optimistic fundamentals. With the iGaming industry blossoming, the company stood to ride a massive consumer wave. Combine that with Foley’s track record, and PSFE should be a big-time winner. Instead, it’s lost much of its upside momentum, currently trading about 7% higher from its initial offering price of $10.
As for SoFi’s API and business expansion opportunities, I’m not going to question the potential here. Simultaneously, investors are probably not going to look kindly at the company’s lack of balance in its revenue stream. As Blankenhorn himself acknowledged, lending represents 83% of SoFi’s business. The problem is twofold.
First, SoFi has other businesses, which are savings and investing. Given the extreme amount of speculation, it’s curious that SoFi hasn’t been able to grab more of this viable market. After all, stock trading on margin hit another record high this past June.
The second concern for SOFI stock is that if the economy goes sour, it could reduce the incentive for consumers to continue using the underlying financial services platform. It’s not an unreasonable forecast, either, especially since the novel coronavirus pandemic is again rearing its ugly head. With California considering a statewide mask mandate — and perhaps other mitigation measures — businesses like SoFi’s are playing with fire.
Is Cheap Money Driving This Fintech?
Also, I can’t help but wonder if ridiculously low interest rates haven’t been the overwhelming catalyst for SOFI stock. With the crazy markets of housing and used cars driven by the cheap money environment, you can’t help but feel some skepticism toward SoFi.
And this is also where I’m concerned about the high exposure to the lending segment. I’m not breaking new ground when I suggest that if interest rates move higher, that’s going to kill appetite for loans. In turn, that could spark a deflationary shock to the economy. Then what?
For now, it seems that if SOFI stock is to recover, the cheap money environment must continue flowing freely. But I just don’t know if that’s going to happen, which is why I’ll be on the sidelines.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.