Two weeks ago, Wall Street and individual investors alike held their breath as Federal Reserve Federal Reserve Chairman Jerome Powell took to the stage at the economic symposium in Jackson Hole, Wyoming. While the investment community listened to Powell’s every word, his remark seemed to resonate well: “It’s time to adjust policy.”
I’m going to go off topic here and assume that the Fed will (finally!) start cutting interest rates. Such a change in monetary policy would be welcomed by many types of businesses.
In particular, I see the fintech platform Sophie (NASDAQ: SOFI) An obvious beneficiary of low interest rates, SoFi shares, an integral part of Cathy Wood’s Ark Invest Management portfolio, have been decimated this year. After falling 26% so far in 2024, SoFi shares are currently trading at just $7.
Let’s explore what’s happening with SoFi’s business and assess the company’s exposure to interest rates. With monetary policy likely to change, now could be a good time. Buy the dip in SoFi stock Hand over fist.
Take a look at SoFi’s entire business
SoFi divides its business into three main segments: lending, technology, and financial services. As the chart below indicates, SoFi has done an impressive job of growing its revenue over the past few years. More importantly, the company has also proven that it has overcome its operating losses and is on track to consistently generate positive net income. Pretty good stuff, right? Well, maybe not.
Despite SoFi’s overall relative strength, there is one flaw in the company’s operations. Lending services are SoFi’s biggest source of growth. The problem is that the lending segment has shown a marked slowdown throughout 2024. During the six months ending June 30, SoFi’s lending business generated a total of $664 million in net revenue — up just 3% year over year.
I can see how slowing growth in the company’s primary source of revenue would not bode well for investor confidence. But I would advise investors not to hit the panic button. There are still a number of important insights to explore before writing off SoFi’s prospects.
How will low interest rates affect SoFi?
Higher interest rates not only increase the cost of capital, they can have a real multiplier effect on the economy as a whole. Businesses and consumers may not be able to access loans at higher interest rates or may simply choose not to take out a loan even if their credit meets the bank’s underwriting protocols. Given that SoFi’s largest business is lending, it’s no surprise that this sector would grind to a halt during a period of rising interest rates.
However, given recent comments from Fed Chairman Powell, I believe the Fed is likely to start cutting interest rates soon – and I am not alone in this expectation. Goldman Sachs, Bank of America, JPMorgan, Wells Fargo, Morgan Stanleyand City Group Everyone expects an interest rate cut in September.
Lower interest rates could be a signal of renewed activity for lending companies. As a result, I see a Fed rate cut as a major catalyst for SoFi, which could help boost the company’s performance. Specifically, I see student loan and mortgage refinancing as three use cases that could see renewed activity for SoFi.
Now, while lower interest rates should theoretically inspire a surge in lending activity, it’s important to assess how this dynamic will impact SoFi’s business. During its second-quarter earnings call, SoFi CEO Anthony Noto explained that when the economy eventually enters a lower interest rate environment, SoFi will “maintain a relatively high interest rate environment relative to our competitors.” He went on to say:
As interest rates fall, the value of our loans generally rises, all else being equal, so we can maintain a superior APR. That doesn’t mean we won’t change it. It just means that it would be better to enhance our differentiated value proposition and leverage our competitive advantage.
What Noto says is that even when rates fall, SoFi is able to maintain higher coupons than the competition because of the company’s diversified platform, which offers users a wide range of financial services products—lending being one of them. In his view, SoFi should see its lending business grow while maintaining strong unit economics despite low interest rates.
Why Now Feels Like a Good Time to Download SoFi
One thing I find interesting about SoFi’s current trading activity is that the stock has fallen during a period where the company has gone from burning cash consistently to enjoying a profitable enterprise. Furthermore, SoFi has been able to generate consistent earnings while its largest source of growth (lending) has remained essentially flat. The main reason for this is that the company’s strategy of cross-selling other products and services across its ecosystem is paying off significantly.
At the end of June, SoFi had 8.8 million members on its platform — up 41% year-over-year. Of that user base, 12.8 million products are being used. That means each SoFi member uses an average of 1.5 services. This dynamic makes it easier to keep customer acquisition costs reasonable, while also achieving higher unit economics across the entire customer base. However, I don’t think investors fully appreciate this dynamic, and they have gone so far as to punish SoFi in the form of a massive sell-off in stocks.
Since lower interest rates will inspire new activity from lending companies across the board, I believe SoFi is very well positioned to see further accelerated growth across the top and bottom lines. In other words, I believe SoFi’s current profitability profile is significantly lower than it could be once the lending business returns to normal growth levels. I believe the business is largely misunderstood, and investors are ignoring the tailwinds that lower interest rates represent for future growth. For all of these reasons, I believe investing in SoFi now is a no-brainer.
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JPMorgan Chase is an advertising partner of The Ascent, a subsidiary of The Motley Fool. Wells Fargo is an advertising partner of The Ascent, a subsidiary of The Motley Fool. Bank of America is an advertising partner of The Ascent, a subsidiary of The Motley Fool. Citigroup is an advertising partner of The Ascent, a subsidiary of The Motley Fool. Adam Spatako He holds positions at SoFi Technologies. The Motley Fool holds positions at and recommends Bank of America, Goldman Sachs Group, and JPMorgan Chase. The Motley Fool holds positions at Disclosure Policy.
Rate Cuts Are Coming: One Fintech Stock From Cathie Wood You Can Buy Right Now For Just $7 Originally posted by The Motley Fool
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