SoFi Technologies (SOFI -0.43%), the one-stop-shop financial services platform for high-income earners, has been a popular stock since going public through a special-purpose acquisition company in 2021. At one point in early 2021, SoFi traded at more than $25 per share, but it has since been sold off heavily like many other fintech stocks.
It now trades below $6 per share, leaving many wondering whether it's time to buy the dip. Here are three reasons to buy SoFi and one reason to sell.
Three reasons to buy
One reason I would buy SoFi is that it is much better insulated from a recession than many other fintech companies, thanks to the borrowers the company serves and its funding advantage as a bank. On the company's first-quarter earnings call, CEO Anthony Noto said that the weighted average FICO score of its personal and student loan borrowers ranges from 746 to 775, which is very high. These borrowers also have a weighted average annual income ranging from $160,000 to $170,000.
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Also, now that SoFi is a bank, it doesn't have to rely nearly as much on high-cost debt and the securitization market to fund loans. Sure, it will likely have to pay up for deposits as interest rates rise, but this will still be much cheaper and more stable than the other sources mentioned above. Having a strong funding source and a loan portfolio composed of high-quality borrowers makes the company a lot better prepared for a recession than many other consumer-facing finance companies.
The second reason I would buy SoFi is that an upcoming catalyst awaits whenever the government lifts the student loan moratorium, which has now been in place essentially since the pandemic started. SoFi got its start refinancing student loans, so this is a business it's really good at. But because many borrowers haven't had to pay interest on their federal student loans, there has been less of a desire for them to refinance. In 2019, SoFi did nearly $6.7 billion of student loan originations. But in 2021, the company only did roughly $4.3 billion of originations. While the federal government may pass some kind of debt forgiveness, there should be a lot of refinancing activity out there after two years of people not paying down debt.
Finally, I think there is a lot of promise in the two fintech businesses SoFi has acquired, Galileo and Technisys. Galileo helps power lots of payments, card issuing, and digital banking capabilities for non-banks. Technisys has built next-generation core processing technology that can help banks and fintech companies better leverage data, roll out new products more quickly, and be more efficient. Many companies and banks are going to need this technology and I think if SoFi can package the two together the right way, it could be very successful. Galileo and Technisys also provide revenue diversity.
One reason to sell
The big reason I have for not buying here is valuation. SoFi has only guided for $105 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2022. With a current market cap of roughly $5.36 billion, that means SoFi trades at more than 51 times adjusted EBITDA. That's not exactly an attractive valuation to own in a rising interest rate environment and when there is a strong possibility of a recession, even if the company is better insulated. SoFi is not yet profitable and reported an actual GAAP loss of more than $110 million in the first quarter of 2022.
Is SoFi a Buy?
In the long term, I do see SoFi as a compelling stock to buy. The company has a strong lending business and will also reap the rewards of being a bank. SoFi also has close to 3.9 million members and has proven to be pretty good at cross-selling. I am also excited to see what it can do with Technisys and Galileo.
But investors should understand that just because it has gone from $25 to $6 per share, that doesn't necessarily make it a screaming buy. The company still needs to show it has a path to profitability and let the valuation catch up a little bit. These growth valuations are not necessarily what you want in the current environment. So, while I view the stock as a buy, I could see it going lower in the near term and do not expect the stock to get back to $25 a share anytime soon.
