SoFi Technologies Rises 12% in a Month: Good Time to Buy?

Shares of SoFi Technologies, Inc. SOFI have witnessed a notable surge of 11.6% in the past month. This rise is significant, especially when compared to the 3.2% decline of its industry and a 2% fall in the Zacks S&P 500 composite.

Since going public, SOFI has shown impressive growth and the last two quarters have been profitable. Adjusted net revenues in the first quarter of 2024 increased 26% year over year. The EBITDA margin for the quarter was 25%, marking a year-over-year improvement of 840 basis points.

One-Month Price Performance

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SOFI has provided guidance of $2.41 billion in adjusted net revenues at the midpoint, indicating 16% year-over-year growth. Although this growth rate is lower compared to the previous year's 35%, the company is showing improvements in its margins. The EBITDA is projected to be in the range of $590-$600 million, or a 25% margin, up from $432 million and a 21% margin in 2023.

The stock's closing price in the last trading session was $7.27, above its 50-day moving average. The rise can be largely attributed to the positive sentiment surrounding the company's financial technology platform, Galileo. Recently, Galileo has expanded its wire transfer services for other fintech companies.

SOFI Trades Above 50-Day Average

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Given the current strength of SOFI shares, many investors may be tempted to buy the stock. However, the critical question remains: Is now the right time to invest in SOFI? To answer this, it is essential to examine the various factors influencing the company's performance and future prospects.

Increasing Digitalization is a Positive

The continuous digitalization across all industries, particularly in the financial sector, presents a significant opportunity for SOFI. As a company that focuses on online banking and offers a comprehensive suite of products and services, SOFI is well-positioned to benefit from this trend.

The demand for online financial platforms is expected to rise, and SOFI's technology platform, Galileo, is not only integral to its banking business but is also being adopted by other financial firms. This expansion positions SOFI to capture more market share from traditional banks. Conventional banking giants like JPMorgan JPM, Bank of America BAC, and Wells Fargo WFC are more mature and are experiencing slower growth.

Additionally, a potential reduction in federal fund rates by 2025 due to slowing inflation could act as a tailwind for the financial sector. This environment will likely lead to increased credit activity and lower depositor charges, particularly benefiting SOFI's lending segment.

Strong Top and Bottom-Line Prospects

The Zacks Consensus Estimate for SOFI's 2024 earnings is pegged at 8 cents, indicating substantial growth of 122% from the previous year. Earnings for 2025 are expected to increase 202% compared to the year-ago actuals. The company's sales are projected to grow 15% and 17% year over year in 2024 and 2025, respectively. In the past 60 days, there have been two upward revisions for each year and only one downward revision, indicating strong confidence among analysts regarding the company's future performance.

Loan Forgiveness Remains an Overhang

Recently, SOFI's stock enjoyed a seven-day winning streak following the announcement from Galileo regarding new wire transfer capabilities for fintech firms. However, this upward momentum was disrupted when the Biden administration decided to forgive $1.2 billion in student loans for 35,000 public service workers under the Public Service Loan Forgiveness program. This decision poses a potential challenge to SOFI's lending business moving forward.

At the end of the first quarter of 2024, SOFI's current ratio was 0.93, which is slightly lower than the industry's average of 0.95. A current ratio below 1 indicates potential difficulties for the company in meeting its short-term obligations.

Stock Looking Pricey

Currently, SOFI's stock appears to be overvalued. The forward 12-month Price/Earnings ratio stands at 41.3X forward earnings, which is higher than the industry's average of 36.48X. Moreover, the stock is trading above its 50-day moving average, and the relative strength index suggests that it is in the overbought zone.

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Hold Off for a More Favorable Entry Point

Given the current valuation and market conditions, it may be wise for investors to exercise caution before buying SOFI shares. The stock's recent performance and strong growth prospects are promising, but the current high valuation and potential risks, such as the impact of student loan forgiveness, suggest that waiting for a more favorable entry point could be a prudent strategy.

As the financial sector continues to evolve, SOFI's innovative platform and strong market position indicate that it remains a company to watch, but timing the investment will be crucial for maximizing returns.

SOFI currently carries a Zacks Rank #3 (Hold).

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