Fed Rate Cuts Loom: Is it Time to Buy SoFi？
With the Federal Reserve likely to cut rates in September, a once-struggling fintech stock might be on the verge of a major rebound.
The Fed’s shift in monetary policy will be welcomed by many businesses, and fintech platform $SoFi Technologies Inc.(SOFI)$ stands to benefit significantly from lower rates.
As a key component of Cathie Wood’s flagship fund at Ark Invest Management, SoFi’s stock has been hit hard this year. Currently priced at $7, SoFi has dropped 26% in 2024.
Let’s dive into SoFi’s business and how it’s tied to interest rates.
SoFi’s Business Overview
SoFi operates in three main segments: loans, tech, and financial services. The company has seen substantial revenue growth over recent years. More importantly, it has moved past its loss-making phase and is now consistently generating positive net income.
However, there’s a flaw in its operations. Loans are SoFi’s biggest growth driver, but loan business showed a noticeable slowdown in 2024. For the six months ending June 30, SoFi’s loan segment generated $664 million in net revenue, a mere 3% year-over-year increase.
Impact of Low Rates
Rising interest rates not only increase the cost of capital but also trigger broader economic ripple effects. Businesses and consumers may struggle to secure loans at higher rates or may choose to forgo borrowing even if they meet bank standards. Given that SoFi’s primary business is lending, it’s not surprising to see loan activity stagnate during high-rate periods.
However, with Chair Powell’s recent statements, the Fed is expected to lower rates soon. Investment banks like $Goldman Sachs(GS)$ $Bank of America(BAC)$ $JPMorgan Chase(JPM)$ $Morgan Stanley(MS)$ $Wells Fargo(WFC)$ $Citigroup(C)$ all predict a rate cut in September.
Lower rates could provide a boost to SoFi’s lending business. Fed rate cuts are a major catalyst for SoFi, potentially revitalizing its student loans, mortgage refinancing, and home equity loans.
Buying SoFi Now？
Despite the stagnation in SoFi’s primary growth area—loans—the company continues to be profitable. This is largely due to its successful strategy of cross-selling other products and services within its ecosystem.
As of June, SoFi boasts 8.8 million members, a 41% year-over-year increase. With a potential rate cut likely to energize the loan business, SoFi is well-positioned for accelerated growth. The company’s potential has been misunderstood, and investors are underestimating the positive impact of lower rates on future growth.
Given all these factors, now is a clear opportunity to invest in SoFi.
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