The S&P 500 index keeps hitting new record highs in 2024, driven higher this month on enthusiasm over the Federal Reserve's recent reduction of the fed funds rate. Plenty of stocks saw significant gains on the news, but SoFi Technologies (SOFI 0.31%) is one stock that has yet to benefit.
SoFi has done a solid job diversifying its business over the past several years. Still, its stock price remains down 51% from the start of 2022, just before the Federal Reserve began raising interest rates. The company has added new deposits at a staggering pace, but concerns linger about its credit portfolio.
With interest rates coming down, investors may want to purchase SoFi stock while it is trading below $10 a share. But they should consider the following first.
NASDAQ: SOFI
Key Data Points
SoFi's multiyear transformation
SoFi stock's poor performance of late doesn't represent the company's progress over the past several years. This fintech got its start in the 2010s as a student loan specialist that used tech to more efficiently handle the student loan process. In 2022, the company acquired Golden Pacific Bancorp, giving it a banking charter that allows it to hold on to customer deposits and loans.
The move came at a good time for SoFi, ahead of the Federal Reserve's aggressive interest rate hiking cycle, and it was able to capitalize on the higher interest rate environment. Last year, SoFi raked in nearly $1.3 billion in net interest income, up over 400% from where it was in 2021. Solid growth continues through the first half of this year, with net interest income increasing 55% year over year to $815 million.
SoFi's deposit base has also grown at an impressive rate. Since it acquired Golden Pacific, its total deposits have grown to nearly $23 billion, thanks to its high-yield savings accounts that currently offer an annual percentage yield (APY) of up to 4.5%.
While SoFi has progressed in advancing its business, it has been a money-burning operation until the past few quarters; last year, it lost $301 million. However, things are beginning to look up. SoFi reported $105 million in net income this year, up from its $82 million through six months last year, and has achieved a profit in three consecutive quarters.
SoFi's push to be the AWS of fintech
SoFi's banking business continues to grow steadily, but one aspect of its business that has me optimistic is its technology platform. Over the past few years, the company has invested heavily in Galileo and Technisys to build its technology platform to help bring banking products to non-bank companies.
Galileo provides back-end infrastructure for fintechs without banking charters, allowing them to process payments and provide other banking services through SoFi. Technisys replaces decades-old legacy systems that made it difficult to innovate quickly. Technysis can help support multiple products at once, runs on the cloud, and allows banks to process and analyze data in real-time. With this technology stack, SoFi has dreams of becoming the Amazon Web Services (AWS) of fintech.
Image source: Getty Images.
The technology platform has bloomed into a business for SoFi that can also be a source of stability thanks to its use of long-term contracts. In the first half of this year, the technology platform's net revenue was $190 million, up 15% from last year, and its contribution profit margin was a solid 33%.
What's next for SoFi
Some concerns linger about SoFi's lending business. In the second quarter, net charge-offs on its $16 billion personal loan portfolio ticked up to 3.84%, from 2.94% one year ago. Also, lending activity has fallen this year "in light of macroeconomic uncertainty," according to CEO Anthony Noto earlier this year. Investors will want to continue monitoring net charge-offs, which could impact the bottom line if they continue to rise.
However, with interest rates falling, SoFi is well-positioned to benefit. For one, Noto has said SoFi will continue offering higher interest rates than competitors thanks to its loan portfolio. This should help it continue growing its deposit base, giving it the capital to hold more loans on its books.
Lower interest rates could also boost its lending business. According to data from the Federal Reserve, personal loan interest rates have gone from 8.73% in 2022 to as high as 12.49% last year. Further rate cuts in 2025 should help reduce borrowing costs and make for a more attractive refinancing environment for consumers.
Is SoFi a buy?
SoFi's earnings have improved, and analysts covering the stock expect income growth to continue over the next few years. This year, they project SoFi's net income will be $173 million, followed by $320 million in 2025 and $577 million the year after that.
Its bottom line is improving, and lower interest rates should be another positive tailwind for its lending business. With multiple growth levers in place, I think now is an excellent time to scoop up shares of the fintech.
