Is The Recovery Rally Here For SoFi?

Key Points

• Shares of fintech lender SoFi rallied Wednesday, but problems surrounding the student loan payment pause and crypto could slow growth.
• Wall Street has a "moderate buy" rating on the stock.
• Analysts see the trend of narrowing losses continuing into next year. 

A pause in student loan repayments and the crypto meltdown are among the problems affecting lender SoFi NASDAQ: SOFI. 

But shares rallied along with the broader market Wednesday. Could it be that the bottom is in? 

The online banking company went public with great fanfare in June 2021, via a merger with SPAC Social Capital Hedosophia. 

Its primary customer base consists of people who skew toward the young, high earning demographic. SoFi aims to offer a wide range of financial services to this market. The idea is that customers will want to bundle most or all of their financial products and services with SoFi. 

The stock briefly ran up in the weeks following its Nasdaq debut but began correcting late that same month. A year ago, SoFi’s price came within 1.2% of its post-debut high. After that, shares rolled over and haven’t staged a sustained uptrend since then, although there have been a few shorter, tradeable rallies.

SoFi’s performance over rolling time frames looks pretty dismal, with returns as follows:

• 1 month: -16.33%
• 3 months: -24%
• Year-to-date: -71.16%
• 1 year: -75.26%

But despite the carnage, analyst data compiled by MarketBeat show a consensus rating of “moderate buy” with a price target of $10, representing a 107.04% upside.  

The company is not yet profitable, but revenue has been growing at double-digit rates in the past seven quarters. Its three-year annual growth rate is 46%. 

Losses Narrowing 

Analysts are optimistic about the company’s ability to continue narrowing its losses. SoFi lost $2.56 per share in 2020, which dropped to a loss of $1 per share last year.

For the full year, Wall Street expects SoFi to lose $0.43 per share, which is seen narrowing to $0.23 per share next year. 

That signals that concern about student loan payment revenue is fading. 

Prior to the pause, which was implemented in March 2020 at the beginning of the pandemic, student loan origination was SoFi’s largest source of revenue. That line of business has dwindled significantly since then. It’s likely to remain muted for the foreseeable future, as the payment pause was extended through June 2023. 

On the crypto front, the company recently received a letter from the Senate Banking Committee expressing concerns about the company’s crypto platform. 

SoFi received its banking charter this year, following its acquisition of Golden Pacific Bancorp. There was a conflict regarding SoFi’s Digital Assets business unit. This is a cryptocurrency brokerage, which is not permitted for companies holding banking charters. Regulators gave the company two years to divest the crypto division. 

The Senate’s letter focused on an expansion of the crypto platform. 

It’s not necessarily the case that SoFi won’t get into compliance in the near future, nor is it clear that the crypto platform will have an adverse effect on revenue or earnings. But it’s a regulatory issue that’s hanging out there.

Time For A Rally? 

Eventually, with any stock there comes a moment of capitulation that indicates a bottoming of price action. 

SoFi shares advanced 5.92% Wednesday, closing at $4.83. The stock sank to a session low of $4.41 on Monday. Being only two days out from its low, it’s tough to get too excited about one day’s strong price action, particularly as SoFi was likely swept up in news pertaining to the Federal Reserve’s possible slowdown of interest-rate increases.

On the plus side, the “moderate-buy” rating may bode well, and signals institutional confidence in the stock going forward. The expected narrowing of losses is also encouraging. 

On the negative side, selling has been accompanied by higher trading volume. In addition, other than on Wednesday, there’s been little enthusiasm to stop the bleeding. While it may seem enticing to start buying shares when a stock is trading well off its previous highs, that can often be a recipe for disaster.