Discounts coming: 1 Cathie Wood Fintech share to buy Hand Over Fist right now for just $7

Two weeks ago, Wall Street and retail investors alike held their breath as Federal Reserve Chairman Jerome Powell took the stage at the Economic Symposium in Jackson Hole, Wyoming. As the investment community hung on Powell’s every word, the following remark seems to have resonated well: “The time has come for policy to adjust.”

I’m going to go out on a limb here and assume that the Fed will (finally!) start cutting interest rates. Such a change in monetary policy would be welcomed by many types of businesses.

In particular, I see the fintech platform SoFi (SOPHIE 1.00%) as an obvious beneficiary of lower interest rates. An integral part of Cathie Wood’s Ark Invest Management portfolio, SoFi shares have been decimated this year. After rising 26% so far in 2024, SoFi shares are currently trading at just $7.

Let’s dig into what’s going on with SoFi’s business and assess how the company is so exposed to interest rates. With changes in monetary policy likely, now may be the time to buy the first dip in SoFi stock.

Take a look at SoFi’s entire business

SoFi divides its business into three main segments: lending, technology and financial services. As the chart below indicates, SoFi has done an impressive job of growing revenue over the past few years. More importantly, the company also demonstrated that it has turned from operating losses and is on track to consistently generate positive net income. Pretty good stuff, right? Well, maybe not.

SOFI revenue data (quarterly) by YCharts.

Despite SoFi’s overall relative strength, there is a flaw in the company’s operation. Lending services are by far SoFi’s biggest source of growth. The problem is that the lending segment saw a noticeable deceleration throughout 2024. For the six months ended June 30, SoFi’s lending business generated total net income of $664 million — an increase of just 3 % from year to year.

I realize that slowing growth in a company’s main source of revenue would not bode well for investor confidence. However, I would caution investors not to hit the panic button. There are a few more important ideas to explore before writing off the SoFi prospects.

How would lower rates affect SoFi?

Rising interest rates don’t just make the cost of capital more expensive; they can also have a real ripple effect on the wider economy. Businesses and consumers may not be able to access loans at higher rates, or may simply choose not to get a loan even if their credit meets a bank’s underwriting protocols. Given that SoFi’s biggest business is lending services, it’s not too surprising to see that segment come to a screeching halt during a period of high interest rates.

However, given Chairman Powell’s recent remarks, I think it is likely that the Fed will start cutting interest rates soon – and I am not alone in this prediction. Investment banks included Goldman Sachs, Bank of America, JP Morgan, Wells Fargo, Morgan Stanleyand City Group all forecast a rate cut in September.

Lower interest rates could serve as a benchmark for lending businesses. As a result, I see a Fed rate cut as a major catalyst for SoFi and one that can help supercharge the company’s performance. Specifically, I see refinancing in student loans and mortgages, as well as home equity loans as three use cases that could see rejuvenated activity for SoFi.

Now, while lower rates should theoretically inspire an increase in lending activity, it’s important to assess the extent to which this dynamic affects SoFi’s business. During the second quarter earnings call, SoFi CEO Anthony Noto explained that when the economy eventually enters a lower interest rate environment, SoFi will “continue to maintain a high rate relative with our competition”. He went on to say that

as rates go down, our loan values ​​generally go up, all else being equal, and so we can maintain a higher APY. That doesn’t mean we can’t change it. It just means that it will be superior to promote our differentiated value proposition and leverage our competitive advantage.

What Noto says is that even when rates fall, SoFi can maintain higher coupons compared to the competition because of the company’s diversified platform, which offers users a multitude of financial services products — loans being just one of them. In his eyes, SoFi should see an increase in its lending volume while maintaining solid unit economics despite low interest rates.

Image source: Getty Images.

Why now seems like the time to load up on SoFi

One thing I find interesting about SoFi’s current trading activity is that the stock has fallen during a time when the company has transitioned from a steady cash burn to a profitable enterprise. Moreover, SoFi has been able to achieve consistent returns while its biggest source of growth (loans) has remained virtually flat. An important reason for this is that the company’s strategy of cross-selling other products and services within its ecosystem is paying off at scale.

As of the end of June, SoFi boasted 8.8 million members on its platform — up 41% year over year. Of this user base, 12.8 million products are in use. This means that each SoFi member uses an average of 1.5 services. This dynamic makes it easier to keep customer acquisition costs reasonable while achieving greater unit cost savings across your entire customer base. However, I don’t think investors fully appreciate this dynamic and have gone so far as to punish SoFi in the form of heavy stock selling.

Given that rate cuts should inspire new activity for lending companies in general, I’d think SoFi is in a pretty solid position to see even more accelerated top- and bottom-line growth. In other words, I think SoFi’s current profitability profile is well below what it could be once the lending business returns to normal growth levels. I think the business is largely misunderstood and investors are ignoring the tailwind that rate cuts are for future growth. For all these reasons, I think investing in SoFi right now is a no-brainer.