Yes. I hear you. I told you to buy SoFi Technologies (NASDAQ:SOFI) stock; you bought SoFi Technologies; SoFi delivered what analysts called excellent earnings; we cheered.
Since then, SOFI stock is down 18%. Shares that cost $10 when earnings came out will sell for just $8.17 when the bell goes off August 21.
I’d be mad too.
But I’d also try to learn the difference between investing and speculation. I think the earnings ratified the climate for SoFi’s business model. Short term moves since are weather.
SoFi Stock Headwinds
The biggest problem is risks to SoFi’s crypto business.
I don’t like crypto. I was curious about it in the last decade. Then I saw what it was about, and I have since advised people against it. It’s “money” protected only by faith in a greater fool and the credit of a few tech-bros.
We don’t need to get into that right now. Some people plainly like it.
The problem is the government is creating a “Novel Activities Supervision Program,” subjecting banks dealing with crypto to new scrutiny. In SoFi’s 8-K report, management says it may be “forced to cease trading in certain types of assets.” It simply has no assurance it can meet the government’s new standards.
Then there is the student loan business. SoFi began as a student loan refinancer, and the moratorium on repayments is ending. But this may not be the huge opportunity SoFi thinks it is, at least according to JPMorgan Chase (NYSE:JPM) analyst Reginald Smith.
SoFi thinks the student loan market should be a $200 billion opportunity over the next few years. Smith figures it at closer to $90 billion. Only 2% of student loans in 2019 were refinanced.
“In most instances, borrowers are better off keeping their existing federal loan and/or applying for an income-based repayment plan,” Jones writes.
I think he’s right.
SoFi Tailwinds
SoFi came to market through a Special Purpose Acquisition Company (SPAC). Most SPACs were garbage. SoFi was the exception.
SoFi, as I noted then, is doing both wholesale and retail business. The wholesale business is Galileo, whose Application Program Interfaces let banks plug-in SoFi’s capabilities to existing systems.
Combine this with Technisys, the banking software company it acquired, and SoFi aims to become the “AWS of fintechs.”
Just as Amazon.Com’s (NASDAQ:AMZN) AWS unit hopes to run everyone else’s Artificial Intelligence (AI) system through its software tools and cloud, SoFi aims to run fintech’s move toward banking through its software stack.
Then there’s the banking business. SoFi is attracting deposits with interest as high as 4.5% on savings. It hopes to make money on this money by charging interest rates starting at 9% on loans, going to over 20% based on the length of the loan and the borrower’s credit.
Some analysts see this as a risky business. I see it as banking business. Revenue is growing at 37% per year. Take out SoFi’s non-cash costs, leaving Earnings Before Income Taxes, Depreciation and Amortization, SoFi already has margins of 16%, more than double those of a year ago.
The Bottom Line
The COVID pandemic, and the recent banking crisis, both put off the coming “golden age” of banking.
But once interest rates ease, and they will, banks like SoFi will be in a very good place.
I also think the government moves against crypto will help SoFi, not hurt it. If SoFi isn’t taking huge deposits from crypto bros, it doesn’t carry the risks of a ‘run’ like the one that took out Signature Bank. SoFi’s target of young, sophisticated savers is precisely right for the rest of this decade, as millennials age into their money and Generation Z enters the workforce.
There has been some rain on the parade, but I’m sticking around.
As of this writing, Dana Blankenhorn held LONG positions in SOFI and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.