Earlier this month, I discussed what could be a major issue with shares in Sofi Technologies (NASDAQ:SOFI). That would be the risk that SOFI stock starts to become valued more like a bank stock and less like a fintech stock.
If this happens? Long-term upside potential may be far more limited than previously estimated. Instead of trading for a high price-earnings ratio, it could sport an earning multiple in line with names like Bank of America (NYSE:BAC) or JPMorgan Chase (NYSE:JPM).
That puts SoFi projected valuation at nearly $9 per share in three years, when it’s projected to earn roughly 59 cents per share in earnings.
That was bad news for the stock, which at the time of that article was trading for just under $10 per share. Even if this failed to happen and SoFi instead sported an earnings multiple more like that of a fintech play (25x), multi-year upside didn’t look that hot either.
However, if tech and growth stocks continue to be out of favor? The chances of SOFI stock falling to a true “can’t miss” price are climbing. There’s no rush to get in today, but keep SOFI stock on your radar. It could soon fall into penny stock territory, which in this situation would put it in bargain territory.
Why SOFI Stock Is a Buy If It Falls to $5
It may be premature to assume that SoFi Technologies will make a trip down to penny stock levels in the near future. As I write this, tech is coming off another tough day, as inflation and the Federal Reserve’s hate hike plans weigh heavily on the minds of investors.
Yet with rates going up and inflation seemingly persistent, it’s hard to see the stampeding out of former high-fliers like SOFI stock ending anytime soon. Before the dust settles, a move below $5 (even if brief) could happen.
You may wonder why dropping into the penny stock territory matters so much here.
After all, low-priced and cheap (in terms of valuation) are not the same thing. However, the situation may be completely different with SoFi. Unlike some of the other speculative growth plays with questionable chances of getting out of the red, that may not be an issue here. Last quarter, it delivered strong results. And by providing strong guidance, it appears likely to do so again over the next few quarters.
That should get SoFi out of the red, with earnings by 2025 projected to hit 59 cents per share. Even if SoFi ends up being valued like a bank stock, a move from $5 to nearly $9 may be a worthwhile return.
Better yet, if SoFi manages to keep sporting a fintech valuation, a move to $14 or $15 would provide a substantial long-term gain.
What Threatens This Bull Case
Admittedly, the bull case for SOFI stock could be considered overly simplistic. I may be placing too much faith in its membership numbers continuing to soar. Not to mention, too much that this soaring membership base enables it to hit profitability targets in the years ahead.
For instance, as my InvestorPlace colleague Larry Ramer recently argued, SoFi may have to keep its foot on the gas when it comes to marketing and sales expenses. Competition remains high in the space. There’s little to differentiate its offering from the competition. With this, it may be unable to reduce its heavy marketing spend without sacrificing revenue growth.
Ramer in his article also detailed the company’s high share-based compensation expenses. As a Seeking Alpha commentator detailed in a recent article, SoFi’s share-based compensation as a percentage of revenue (24.3%) is leaps and bounds above its fintech rivals. If this continues, the dilutive impact could lessen its chances of hitting long-term earnings targets.
In short, it’s anything but a low-risk situation. Nevertheless, if it drops down far enough, these negatives will be far outweighed by the positives.
The Bottom Line
In hindsight, it may have been far-fetched for SoFi Technologies to trade for $20 or nearly $25 per share last year. Yet in the long run, it may be justified for this digital-first financial supermarket to someday trade again for $10 to $15 per share, or at the very least, high-single digits.
Of course, at around $8.20 per share today, this points to minimal upside. Yet if the sell-off in tech plays carries on, the opportunity to buy SOFI stock at a price that takes into account its risks and provides ample upside potential could soon emerge.
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.
