This selloff allows investors an attractive entry opportunity to invest in a company positively impacting the lives of millions. SoFi, short for Social Finance, is a fintech stock with the potential to become a multi-bagger.
Earlier this year, SoFi was listed through a reverse merger with special purpose acquisition company (SPAC) Social Capital Hedosophia Corp V, a shell company run by SPAC guru Chamath Palihapitiya.
Founded in 2011, focusing on student loan refinancing for millennials, SoFi has a cost-efficient multi-product business model, which can take advantage of the current digital tailwinds.
Despite these positives, SoFi is down roughly 35% since its reverse SPAC merger in early June. Part of it is because of the muted guidance in the latest earnings report.
The rest is attributable to the triggering of the lock-up expiration on 83% of shares held by early investors, allowing them to realize gains at market value throughout July.
Due to the additional SoFi shares released into the market, the stock experienced significant price dilution before finding support between $15 and $16 at the end of July.
However, SoFi remains well-positioned due to strong tailwinds accelerating the global transition to digital. Both events weighing down market sentiment are transitory, and there is a significant upside to investing in this one ahead of its near-term material catalysts.
Kneejerk Reaction Hurt SOFI Stock
SOFI stock tanked after the fintech reported its Q2 2021 earnings due to a higher-than-expected loss and muted outlook. If you look closely, though, the numbers aren’t that bad.
SOFI surpassed its financial outlook in Q2, and it recorded record quarterly revenue and its fourth consecutive quarter of positive EBITDA. Revenues in the quarter jumped 74% year over year to $237 million, and adjusted EBITDA was $11 million.
SOFI has three business lines: its lending segment, financial service segment, and technology platform segment. The major point of concern for investors is the lending business. That’s because student loan refinancing represents a large part of the overall business.
In March 2020, as part of The Cares Act, the U.S. government authorized comprehensive student loan relief from March 2020 through September 30, 2020. Several extensions have followed, with the most recent being President Biden lengthening the federal student loan payments pause through January 31, 2022.
SOFI’s student loan refinancing fell 50% due to the suspension of payments. Before the recent Biden announcement, SOFI unveiled 2021 guidance based on the student loan moratorium. SoFi forecasted revenues in its lending service to progress toward the end of 2021. The lending segment was expected to deliver $980 million in total revenue for the year.
Undoubtedly, the Biden Administration’s decision to extend the federal student loan moratorium is a body blow. However, by focusing on its financial service segment and technology platform, SOFI generated additional revenue to compensate for the losses generated by the moratorium extension.
Eventually, the previously forecast demand for federal student loan refinancing will return. This is not a major long-term issue for the company.
The Bank Charter Acquisition Is a Major Tailwind
SoFi’s decision to purchase Golden Pacific Bancorp in March is expected to accelerate acquiring a national bank charter.
It will be a major catalyst for the stock when it happens. SoFi already filed the paperwork for a national bank charter last summer and obtained conditional approval in October, but the Golden Pacific purchase will fast-track the full approval process for SoFi’s national bank charter; the deal will close at the end of the year.
LendingClub (NYSE:LC) followed a similar path, purchasing Radius Bank for $185 million in cash and stock. So, the company is not doing something wholly unique.
A national bank charter will be a gamechanger for SoFi. Its lending platform represents 86% of total revenues in 2020, with an approximately 54% contribution margin.
A national bank charter will enable SoFi to improve its lending business by making loans through member deposits instead of borrowing from third-party banks. It will also help encourage SoFi members to use the platform as their primary bank account.
Overall, expanding lending capabilities and financial service offerings will be a major catalyst for SOFI stock. The developments will also lead to greater cost-efficiencies through higher growth and margin expansion.
Recent Pullback Is an Attractive Buying Opportunity
In my last article, I detailed SoFi’s overall growth prospects and exciting fintech ecosystem. The much-anticipated approval of a national bank charter will further enhance overall growth prospects, margins, and price momentum.
SoFi’s differentiated business model will also benefit from secular tailwinds. Retail customers are increasingly looking to shift their banking online, and the pandemic only enhanced this trend.
By all accounts, the recent pullback is an attractive buying opportunity.
On the publication date, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.