Right now may not seem like the best time to buy SoFi Technologies (NASDAQ:SOFI) stock.
The factors that helped growth stocks perform well are starting to reverse. Investors are likely to become less interested in paying rich prices for what are otherwise promising names.
Scores of growth stories may be in for serious declines due to valuation. However, the situation here could be an exception. Events playing out in the coming months bode very well for SoFi’s underlying business. This may help counter any market-related pressure.
Along with this, there is the high potential for SOFI stock to continue seeing higher-than-expected rates of revenue growth and user adoption. This was key in Jefferies analyst John Hecht’s recent bullish rating.
Market volatility still stands to knock it to prices below where it sits today (around $16.15). But with the factors on its side possibly countering this, today may be the right time to initiate a position.
Plenty of Catalysts on the Table With SOFI Stock
Yes, there are many catalysts ready to play out in the months ahead for SoFi Technologies. These could help send it back, surging toward the $25 per share that the former special purpose acquisition company traded for following its successful listing.
What are these catalysts?
First, SoFi should successfully close its Golden Pacific Bancorp (OTCMKTS:GPBI) purchase. Buying Golden Pacific gives it a bank charter. Having one will give this digital-first financial institution the same advantages that old-school banks have.
Second, the student loan moratorium set in place since the start of the coronavirus pandemic will end in January. This will result in improved results for its student lending business, which is where SoFi got its start.
On top of both these forthcoming events, is a third factor that may give SOFI stock a boost. I’m talking about its very good chances of delivering stronger-than-expected results. Why? For the same reason pointed out by Hecht in his rating on the stock. The rationale for Hecht’s buy rating, and $25 per share price target, was built largely around the potential for SoFi to successfully cross-sell financial products to its fast-growing user base.
This paves the way for it to see over 50% sales growth next year, and far lower net losses. Yes, narrowing losses aren’t the same thing as soaring profits. Also, despite trading for well below its past high, shares still look pricey. These issues at first glance may scare you off. But diving into the details, either issue is not a deal breaker.
What About Profitability and Valuation Concerns?
There’s a reason why, despite its stellar prospects, SOFI stock hasn’t soared back above $20 per share: profitability and valuation concerns. Similar to another Chamath Paliphapitiya-backed SPAC, Clover Health (NASDAQ:CLOV), SoFi isn’t having problems growing its top line. It’s getting out of the red that’s an issue.
However, while Clover faces plenty of hurdles when it comes to narrowing its heavy losses, that’s likely not the case with SoFi. Besides potential stronger-than-expected revenue, rising interest rates could put it on a faster path to profitability. As the spread between long-term and short-term rates again widens, financial institutions could see much higher margins. This is a factor I’ve seen few talk about when discussing this company.
What about valuation? A forward price-sales ratio of 9x (based on 2022 projections) is by no means cheap. Rising rates, despite helping its underlying business, could have the opposite effect on its stock price. We’ve seen this play for growth stocks in general lately.
It’s tough to handicap to what extent a fall in stock valuations will impact SOFI stock. It may be as severe as to knock it down below its $10 per share SPAC offering price. Or, its many positives could soften the blow, resulting in only a slight pullback from present levels. So, instead of waiting for SoFi to move lower before buying, it may be better to ease in slowly. Wait too long and you miss out on grabbing it before SOFI stock takes off again.
The Verdict: Don’t Write Off SoFi
Overall, it’s best to be careful when it comes to buying tech stocks right now. High-flyers in the tech sector may experience further valuation-related declines. Even as their underlying results remain strong. However, it may not play exactly the same way with SoFi Technologies.
With many things around the corner that could give it a boost, buying SOFI stock now could be the way to go.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
