So much for the big bounce in Sofi Technologies (NASDAQ:SOFI) stock. On Jan. 19, the San Francisco-based fintech company’s share price jumped more than 20%. That was on news that it had cleared the final hurdle to becoming a bank holding company. However, in just one week, shares have pulled back 15% on broader market weakness and as bank stocks turned negative following disappointing quarterly results from some of the biggest U.S. lenders.
At its current price of around $12.70 per share, SOFI stock is now 55% lower than its 52-week high of $28.26, which was reached at the start of February 2021. However, the recent decline shouldn’t takeaway from the fact that Sofi Technologies remains a promising financial services name.
Here’s what you should know about this stock moving forward.
SOFI Stock: Becoming a Bank
Sofi Technologies has received approval from both the U.S. Office of the Comptroller of the Currency and the U.S. Federal Reserve to officially become a bank holding company. This is major news for SOFI stock. The company has long sought to become an official bank.
Until now, Sofi has had to rely on partnerships with FDIC-insured banks to hold customer deposits and issue loans. The transition to a bank will enable the company to offer a wider array of products beyond the loans, cash accounts and debit cards it already offers to consumers. It will also provide the company with more flexibility to set interest rates and loan terms.
With a bank charter secured, Sofi is now looking to expand aggressively and quickly. The lender has estimated that the financial services market could be worth $2 trillion annually and says it’s eager to capitalize on the growth opportunity.
To complete its transition, Sofi is acquiring Golden Pacific Bancorp (OTCMKTS:GPBI) in a deal that will enable it to operate as a bank subsidiary. Once the acquisition is complete, the company — which began life a decade ago as a student loan refinancing platform — plans to begin ramping up the personal loans and credit cards it offers consumers. It also plans to enhance its app, which enables people to complete most of their banking transactions in one place.
Sofi also has an online brokerage arm that allows clients to trade stocks, exchange-traded funds (ETFs), fractional shares and even cryptocurrencies like Bitcoin (CCC:BTC-USD) for free. During the third quarter of last year, the company reported that it grew its total membership to 2.9 million accounts, a 96% year-over-year (YOY) increase.
Financials and Market Debut
Sofi has experienced strong growth in recent years. The company forecasts that it will post $1 billion in revenue for all of last year. Sofi also reported that its personal loan business grew 166% YOY in Q3 2021. Those kinds of numbers attract attention. However, if there is a knock on Sofi, it’s that the company is not yet profitable.
Analysts have forecast that the lender should become profitable by 2025. That’s a ways out. And the combination of big growth and a lack of profits has gotten SOFI stock lumped in with other highly valued, unprofitable tech names that are now seeing big declines.
SOFI stock also has the distinction of being one of the biggest special purpose acquisition company (SPAC) deals of 2021. The company went public via a reverse merger on Jun. 1 last year with a blank-check company run by investor Chamath Palihapitiya. In the six months immediately following its market debut, the share price declined 40%. And that was before the pullback over the last month. Yet, despite its SPAC pedigree and being lumped in with high-flying tech stocks, SOFI shares are actually reasonably valued. Currently, the stock trades at a price-sales (P/S) ratio of 13.8. That’s respectable given the company’s massive growth rate.
Buy SOFI Stock at Beaten-Down Levels
Sofi Technologies has potential, especially now that it has been granted a bank charter. The transition to a bank holding company distinguishes it from many of fintech peers, including PayPal (NASDAQ:PYPL) and Block (NYSE:SQ). Moving forward, Sofi will be able to expand its banking products and grow its business at an even faster clip. And, at less than $13, the stock currently offers an advantageous entry point. Right now, the median price target on SOFI stock is $20, suggesting 59% upside from current levels.
However, SOFI stock is not without risk. In the current environment, unprofitable tech names like Sofi are getting beat up more than other stocks. Plus, the shares have been in retreat since the company went public last summer. The share price may not have formed a bottom yet and could fall below $10 if the current market downturn persists.
Given the risks, investors should take a small position in the stock and add to it gradually on any further weakness. In time, the share price should recover and reward patient investors. SOFI stock is a cautious buy.
On the date of publication, Joel Baglole held a long position in SQ. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
