Fintech has been, at least in terms of its reputation, one of the quickest boom and bust cycles I can remember. It seemed like nobody had heard of the phrase a few years ago, then it was on everyone’s lips, and every company that had some technological base for a financial offering was soaring. As often happens in those cases, though, time showed that just being labeled a fintech company wasn’t any guarantee of success. There were some high-profile struggles and failures, but then the pendulum swung too far the other way and just about every fintech stock dropped dramatically.
What is becoming clear now, though, is that some companies have evolved into solid businesses with a wide range of products and offerings. Chief among them is SoFi (SOFI), the San Francisco based company that reported calendar Q1 earnings this morning. Early in its existence, SoFi was best known as a company specializing in offering and refinancing student loans, a business that hit a problem when the Biden administration announced a moratorium on loan payments. They are suing the government to reverse that decision, claiming that it has unfairly hurt them, which brought some criticism to the company, but, as I have said many times, investing (or not) based on political considerations is a mug’s game. What matters is a company’s performance.
Still, that and a slower-than-anticipated path to profitability has caused the stock to struggle for a while, dropping from a high of $28.26 shortly after going public by way of a SPAC merger in late 2021 to as low as $4.24 late last year. Like many tech stocks, though, it has bounced back a bit this year, and closed on Friday at $6.23.
So, how is the performance? Well, in Q1, SoFi reported a loss of $0.05 per share, better than the consensus estimate for a loss of $0.08 and significantly better than the $0.14 per share loss reported a year ago. More importantly, they also repeated their prediction that they would be profitable by the end of this year.
That seems quite reasonable, given that SoFi has evolved into so much more than a student loan company. They offer a range of online and app-based banking and investment services, and their revenue is increasingly coming from non-educational personal loans and other sources and their membership base continues to grow. That diversification looks smart right now, as does their quirky branding as an alternative to traditional banks, after trust in those conventional banks took a hit from the regional banking issues we have seen recently.
The opportunity in the stock comes from the fact that until now, analysts haven’t believed that SoFi would fulfill their prediction and report positive EPS by Q4 of this year. Some anticipate small profits next year, but even there, the consensus estimate is for only $0.03 for the full year. This earnings report represents faster-than-anticipated growth, so over the next few days and weeks, as these numbers are digested and fed into calculations, that number is likely to move significantly higher.
And yet, the sentiment around the stock hasn’t caught up to this; even after those results, following an initial pop, a significant selloff was seen once the market opened this morning, taking the stock back below $6. Whether you want to believe SoFi’s management or not, however, the simple fact is that they showed last quarter that the numbers support their assertions that EPS will be positive by year’s end. Analysts will have to adjust to that and as they do, the stock will recover, so SOFI looks like a buy on this drop.
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