After Its Retreat, SoFi Stock Poses Little Risk to Buyers

SoFi Technologies (NASDAQ:SOFI) is one of the latest SPAC stocks to become publicly traded. After its successful merger, SOFI stock is now proudly trading on its own. However, it hasn’t necessarily been smooth sailing for the company. 

the Social Finance (SoFi stock) logo is displayed on a smartphone.
Source: rafapress / Shutterstock.com

The firm has an opportunity to generate some serious growth over the next few years, but SOFI stock has taken its owners on a volatile ride thus far. Some investors will argue that volatility provides opportunity. Others will argue that it makes owning the shares for a significant length of time too much of a headache.  

Both observers can be correct, for what it’s worth.

From its June high to its recent low in July, SoFi has already tumbled 40%. I like to look for high-quality stocks that have undergone  40% corrections. I’m not saying that SoFi is a low-quality name. But it is unproven. That said, it could be a low-risk buy right now. 

Trading SOFI Stock

Daily chart of SOFI stock
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Source: Chart courtesy of TrendSpider

We’ll get to all the company’s fancy growth prospects and its long-term potential in a minute. Right now, let’s focus on the technicals. 

 

Not too long ago, this stock was nearing $25. Now it’s back around  $15. This area has been a long-term support zone for the stock. Does that mean it has bottomed? Of course not!

Just like resistance, support can always break. But until it breaks, we must respect this zone as the support level. If SOFI stock breaks below $15,  the May low of $14.14 may be in play.

During SoFi’s early May decline — when growth stocks were in a bear market —the stock’s failure to retest its Q1 lows was positive. I have no way of knowing where the low is for SOFI stock. However, for those who like the company’s long-term outlook, this seems like a reasonable area to begin accumulating a position. 

If $14 fails to hold as support, look at the $12 to $13 area to act as support. On the positive side, $20 is a clear focus. 

Breaking Down SoFi’s Growth

At its current price, SoFi commands a market capitalization of roughly $12 billion. That’s about 12 times this year’s revenue forecast, as analysts, on average, are calling for $982 million of sales. It’s also not profitable, with analysts, on average, expecting a loss of 27 cents per share this year and 10 cents per share next year. 

While that’s a bit pricey by most standards, it’s the company’s future potential that has investors excited. 

If SoFi can hit $982 million of revenue this year, that would represent roughly 58% growth versus 2020. In 2022, analysts, on average,  expect the company to generate roughly 52% growth and reach about $1.5 billion of sales. These are seriously impressive numbers. 

Ultimately, management believes the company will report almost $3.7 billion of revenue and EBITDA, excluding some items, of $1.2 billion by 2025. If it can meet those top-line targets, its compound annual growth rates will exceed 40%, and SoFi will be pretty profitable.

The problem of course is the “if” part of that statement. When companies provide a multi-year forecast, investors have to take a bit of a leap of faith. 

But when we examine SoFi’s businesses — student loan refis, crypto trading, investments, loans, and budgeting — we do see a clear path to faster revenue growth than most banks, (even though a majority of SoFi’s revenue is currently from banking). 

It Comes Down to Risk/Reward

Either SoFi will generate meaningful growth or it will not. Either that growth will trickle down to the bottom line or it will not. 

At $25 or $30, SOFI stock may not be all that attractive. However, at $15 there are some technical and fundamental reasons to be long,. Put simply, the stock’s risk/reward ratio is positive.

SoFi will grow, but the question is how much it can do so over the long-term. Its valuation is not insane if the company really does generate much of what management thinks it can over the next few years. It is insane if SoFi ends up being “just a bank.” 

If the shares fall below the $14 to $15 area, I have my eye on $12, then $10  On the upside, I see a return to $25-plus as possible. In that sense, I like SOFI stock after the recent dip, but we’ll have to see how it progresses in the quarters ahead. 

Is SoFi the next PayPal (NASDAQ:PYPL)? That’s a difficult claim at this point. But that doesn’t mean that SoFi can’t be a rewarding holding. 

On the date of publication, Bret Kenwell held a long position in SOFI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell


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