Short interest at SoFi could quickly send the stock flying higher

Key Points

• SoFi stock is showing a new increase in its short interest; whether this move is justified becomes the question.
• Understanding the dynamics behind the company's profit centers and why Buffett thinks they'll keep growing could sway the outcome of a short squeeze.
• Analysts agree, and the financials back the potential claim for this stock ending up higher than it is today.

Have you noticed how life has been getting slower lately? Summer and Spring travel is over for the most part, and the end-of-year bug has bitten everyone this month, especially those on Wall Street. The markets are absent for the most part; just take a look at the VIX!

After coming off its 30-35% levels that lasted basically all of 2021-2022, the VIX has returned to its lowest levels since 2019, which means stocks are moving slower than ever. This could be a welcome break for those who had a roller coaster of a year during 2023, but you are no average investor; you are here for your pound of flesh before the year ends.

The key to making money in a situation like this is to find a stock set to move. Today, SoFi Technologies NASDAQ: SOFI seems to fit the description for reasons that will become obvious in just a bit. You see, there is a perfect storm getting ready to take this stock higher, yet no one is talking about it.

Tools of advice

Because you are not the average investor, it is probably good that MarketBeat is equipped with research tools to let you itch your mind when it wants to dig up great ideas.

In the case of SoFi, you can start with many of them, but knowing how to read short interest (as a percentage of total shares) will be an excellent first step.

This metric has risen from 11.8% to 16.1% in just a quarter; that's a 36.4% jump! And the stock's positioning in the sector can make that a very advantageous situation. But before you dig into the main course, you should know why short interest matters. 

Shorting a stock is a complex process of borrowing shares from someone, selling them in the market, and repurchasing them later to return to their original owner. Think of this interaction: "I'm short a couple of bucks. Can you spot me, and I will cover you (pay you back) tomorrow?" hence the word being 'short.'

The real kicker is in that repurchasing sequence; when you want to close your short position, you need to buy back the stock to return it, right? So what happens if a stock goes up (putting you at a loss) and you need to bail out (buy the stock)?

If you and other shorts are buying the stock to get out, and that stock is already going up, an endless upward momentum wall will be built. And that is what markets are looking to do with SoFi stock today.

Markets want a boom 

When you look across the technology stock groups, SoFi stock is at an advantage compared to competitors like Nu Holdings NYSE: NU and Block NYSE: SQ, particularly regarding earnings growth expectations.

So look, before you dig into analyst projections and whatnot, understand why markets turned bullish on SoFi in the first place. Believe it or not, this is all connected to Buffett's latest investments in homebuilders, as he sees a booming demand for real estate in 2024.

A thing like that according to the last quarter financials at SoFi, home loans rose by a massive 64.0% over the past twelve months, and that is before Buffett is ultimately proven right and mortgage demand soars even higher. 

So there's a story behind the numbers, but what makes SoFi unique over other more renowned names in the fintech industry? Well, it all comes down to the one thing that investors value most: growing profits.

While competitors Nu and Block have their analysts pushing for earnings per share growth of 86.4% and 52.6%, respectively, over the next twelve months, SoFi analysts remembered their boldness at home this time around to blow the competition out of the water.

With a projection pointing to 115.0% growth in earnings, SoFi beats the competition and the whole industry on average. Fintech is expected to grow its EPS by 28.8% on average for the next twelve months. But why would more money be pouring in to short the shares?

That is a good question for lucky stars to answer because it doesn't make much sense. Revenues grew by 27.0% over the year, and the expected growth in their financial products (namely mortgages) will only expand their interest income to be reported.

So, will this stock trigger a wall of buyers needing to cover their short positions? Only time will tell, but in either case, there is a clear proposition as to why the stock could see better days ahead.