SoFi Technologies (NASDAQ:SOFI) stock started 2022 facing sharp selling pressure. After it peaked at over $24, SOFI stock failed to retake the bullish momentum that faded in November.
Technical traders may have interpreted the breakdown below the $18 nearly two months ago, or the 200-day moving average, as a bearish sign.
Markets are not considering the fundamental upside ahead. The national bank charter is a positive catalyst. Yet the boost for its business is not convincing markets to buy SoFi’s dip.
SOFI Stock Faces Heated Competition
Investors are worried that giant fintechs like Block (NYSE:SQ) and PayPal Holdings (NYSE:PYPL) are facing a slowdown. As the Federal Reserve panics to contain rampant inflation, it will raise rates. Established banks will trillions in assets will earn income from wider interest rate spreads.
Fintech firms will not. They need to build the customer base to attract more assets. After SoFi’s deposit amounts grow when it receives a bank charter will its interest income increase.
SoFi also needs to sustain current customer growth rates. It will incur costs from advertising spend. Furthermore, operational expenses will rise as the company adds staff and invests in technology to keep its customers satisfied.
This year, Super Bowl LVI will be played at SoFi Stadium in Los Angeles despite the virus surge. The company will benefit from the extra media coverage. Still, during the Y2K bubble, Pets.com had a sock puppet advertisement.
At the macro level, higher interest rates will slow the economy. The markets are pricing those risks by lowering SoFi’s valuations. Risk-averse investors may buy SQ or PYPL stock instead of speculating on SoFi.
Opportunity
SoFi’s unclear outlook is pressuring its shares. Investors with a time frame of at least five years may bet that this fintech will keep growing. The company has 400 institutional owners. Those investors believe that SoFi will emerge as a one stop shop for financial products that meet customer needs.
Customers would view SoFi’s products as more comprehensive than Venmo, PayPal and CashApp. Word of mouth would compel more people to join.
Next month, SoFi’s third-quarter report will give shareholders insight into its business performance for 2022. The company will demonstrate that its operating expenses are falling as revenue grows. Furthermore, management might forecast how its $1.2 billion acquisition of Galileo will pay off for shareholders.
SoFi’s bank charter will lift its prospects. Markets will raise the company’s valuation as a bank. Moreover, it will have financial services alongside Galileo for creating large sources of non-interest income.
Valuation
Chief Executive Officer Anthony Noto does not have an opinion on the near-term value of SoFi. Its trading range of below $13 and as high as $28.26 varies with what the market willingly pays for the stock.
Noto will develop the business. The company must deliver a high return on invested capital and return on equity in the long run. Investors need to review those leading indicators. Noto said at a Wells Fargo virtual conference that “we’re positioned to have a really high ROE and ROIC business that we articulated that during the five-year road show.”
The majority of Wall Street analysts rate SoFi stock a buy. The average price target is $22, according to Tipranks. In a downside scenario, investors may compare SoFi to related companies. This price-book multiples model suggests that SoFi is worth around $13 a share.
Risks
SoFi’s quarterly membership growth will vary. Combined with a lag between member growth and product uptake, investors need to wait for SoFi to report sales growth. Still, SOFI stock will likely benefit with around 1.4 or 1.5 product sales per member. As the user base grows, SoFi’s operating efficiency will improve. Its business model leverages user growth.
The slowing economy in the quarters ahead may require SoFi to spend more on advertising to attract customers. Fortunately, SoFi has a great referral program. Customers who like its product will invite others who seek the same product types. Thanks to NFL games at SoFi Stadium, the company should get a boost from the large audience broadcasting the game.
Your Takeaway
SoFi’s downtrend will shake out impatient investors who sought to trade for a quick buck. Long-term investors may build on their position at favorably low prices. A few years from now, SOFI stock may reward the most loyal investors.
On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
