Opinion: This is Cathie Wood’s best stock for under $10

Ark Invest’s Cathie Wood has gained a large following for her conviction in emerging markets such as biotechnology and artificial intelligence (AI).

But it also holds some investments in companies in less cutting-edge industries.

So let’s explore the fintech company SoFi technologies (SOPHIE 0.51%)which I believe is a rare example of a stock in the Ark portfolio where the stock price and underlying fundamentals are disconnected. With SoFi stock trading below $8, I see SoFi as Wood’s best stock under $10.

A new twist on financial services

Banking, opening a brokerage account, and buying insurance are some of the most common examples of financial services. While some companies may offer all or a combination of these services, I wouldn’t be surprised if you use a different company for each of these products. For example, maybe you have a mortgage with Wells Fargo but invest your money through Charles Schwab and you have auto insurance with Geico.

While this structure can work, one downside is inefficiency. Transferring money from your Wells Fargo savings to an investment account at Schwab can take a few days. Plus, if you have a customer service need and can’t get it over the phone, you probably have to go to a brick-and-mortar location and stand in line. This can be a time-consuming and frustrating process.

SoFi has reimagined the concept of financial services. The company offers a range of lending and banking products, as well as insurance policies and investment capabilities, all on one online platform.

Building a one-stop shop that offers a variety of financial services allows SoFi to effectively sell additional products to users. The company refers to this strategy as a “financial services productivity loop,” and it’s working.

While lending is SoFi’s biggest source of revenue, its other products are growing at faster rates. At the end of the second quarter, the ratio of SoFi’s total financial services products to total lending products was approximately 6:1.

As SoFi builds stronger unit economics across its user base, the company is able to allocate capital more efficiently, leading to profitability.

SOFI Net Income Data (Quarterly) by YCharts.

What Could Affect SoFi Stock?

At the time of writing, SoFi shares are down 26% from its initial public offering (IPO).

I think a lot of sales is due to the competitive landscape. Many skeptics see SoFi as nothing more than a small, start-up bank that will never be able to compete effectively with larger operators. This perspective is not unlike the bear investor who considered adze just a car company — a narrative that turned out to be incorrect, but took quite a while to come to fruition.

Another reason for the negativity about SoFi comes from How the company went public in 2021. SoFi opted to merge with a publicly traded special purpose acquisition company (SPAC) as opposed to a traditional initial public offering (IPO) with an investment bank.

According to a University of Florida study, SPACs have rarely been good long-term investments. For example, between 2009 and 2024, the average performance of SPACs in the financial services sector is dismal. negative 65%

The last variable that has weighed on SoFi stock over the past two years is the 11 interest rate hikes by the Federal Reserve. Simply put, higher borrowing costs hurt SoFi’s lending business.

Image source: Getty Images.

Is SoFi stock a buy right now?

I will admit that valuing SoFi stock is quite difficult. While the price-to-book (P/B) ratio can be helpful, I believe it is a tool better used to evaluate traditional bank stocks. Moreover, given that SoFi’s transition to profitability is still relatively new, I don’t think the price-to-earnings (P/E) ratio is yet fully useful.

I think SoFi needs to be looked at through a Sum of the Parts (SOTP) methodology. A SOTP model looks at each segment of a business individually and applies a valuation multiple to that specific operation.

Given that SoFi operates in so many different pockets of the financial services space, I think the company’s various business segments and their growth prospects need to be looked at individually — and I see some obvious catalysts on the horizon.

The Fed has finally started to cut interest rates. I believe this will help reignite growth in SoFi’s lending business, which should boost the company’s profitability. Additionally, as SoFi builds out its technology-based services, it should have wider profit margins than legacy financial services firms. That should support a premium rating.

I think SoFi is misunderstood and the low share price reflects an inaccurate narrative about the company.

While valuing SoFi using traditional metrics is challenging, it’s hard to overlook a company that’s disrupting multiple markets and doing so in a profitable way. When you place the company’s catalysts in its lending business and consider its growth in other areas outside of lending, it becomes even harder to ignore SoFi’s future growth prospects.

To me, SoFi stock is a steal at less than $8 and I think now is a profitable opportunity to load up and hold for the long term.