Cathie Wood became an investing hero when her exchange-traded funds (ETF) that focus on disruptive technology stocks zoomed higher early in the pandemic, outperforming the market and delivering incredible gains for shareholders.
That changed in the bear market when investors dumped growth stocks and ran toward safe stocks. But as the market has swung back firmly into bull territory, many of Ark Invest's funds are outperforming again.
Ark has been scooping up shares of digital bank SoFi (SOFI 0.11%) stock recently, adding more to two of its ETFs. Should you follow Cathie Wood's lead?
How SoFi stands out
SoFi is in the rather interesting position of being a bank and a fintech. It has some stability due to its large cash reserves in the form of account deposits and a well-established credit business, but there's risk -- and reward -- due to its youth and innovation mindset.
It began as a cooperative for student loans, and it grew from there as management recognized the need for a full financial services center geared toward the needs of students and young professionals.
NASDAQ: SOFI
Key Data Points
Chief Executive Officer Anthony Noto spoke with Cathie Wood and called SoFi's sweet spot "mass, affluent high earners." He doesn't think their needs are being met, and SoFi is going after this unfulfilled space with a one-stop shop to provide everything they need to manage their finances easily. This is a group that is educated and earning; more than 90% of SoFi's accounts are direct deposit. These clients are making money, and these are sticky deposits.
SoFi's goal now is to capitalize on this lucrative market. It's developing all sorts of initiatives to run with this ball: IPO investments and alternative investments, all with an easy-to-use interface. These are customers who have some discretionary income but need some help to build it to a level of achieving their financial ambitions. When SoFi provides that, it gains their trust and leverages its accounts to generate fees and revenue, scaling its business and becoming more profitable.
SoFi just reported its first GAAP profit
SoFi has been demonstrating growth and momentum since it became a public company, but its stock tanked in the bear market when unprofitable growth stocks at high prices fell out of favor with investors. However, SoFi has continued to report remarkable growth and sustained momentum, capturing market share and demonstrating that it has a viable business meeting its customers' needs. There are many digital banks that have sprouted that offer easy online banking, but SoFi has shown a keen understanding of its clientele and how to expand its business.
That's why it has a range of products in three segments: the original lending products, financial services, and technology platform. Its strategy is to get clients in its affluent target market to sign up for an account, bringing them into the company's ecosystem where it cross-sells other services to become their preferred financial services institution.
Management reiterated several times that it would report a profit in accordance with generally accepted accounting principles (GAAP) in the 2023 fourth quarter, and it came through with $48 million in net income off of $615 million in revenue. Even better, it's anticipating another profit in the first quarter as well as a full-year profit of about $100 million.
SoFi's price drop is an opportunity
Although Cathie Wood's approach is often seen as the opposite of value investor Warren Buffett's, they aren't diametrically opposed. Wood recognizes a bargain as well as any savvy investor, and although she goes for growth and disruption, she isn't passing up the chance to buy an incredible stock at a great price.
SoFi stock soared after its fourth-quarter report, but then it immediately plummeted, losing all of its gains. It's now up only 9% over the past year despite its stellar performance. At the current price, it trades at a price-to-sales ratio of 3.8, which is cheap for a high-growth stock.
If you have a high tolerance for risk and love growth stocks, you might want to invest in one of Cathie Wood's ETFs, like the flagship ARK Innovation Fund (ARKK +2.93%) or the ARK Fintech Innovation Fund (ARKF +3.01%), both of which just loaded up with SoFi stock. Or, you can follow her trades and make your own decisions.
SoFi's drop looks like an opportunity for the forward-thinking investor, and with patience and time, you're likely to be rewarded.
