Should You Buy SoFi Stock Before Oct. 27?

As we enter the last week of September, it's time to look ahead to third quarter earnings season, and more specifically, banks -- the first major group to report earnings every quarter.

Banks have had a good year so far, in general, but the third quarter has been a bit rocky. The record pace of investment banking in the first half has slowed, and banks are expecting lower investment banking fees. In addition, the Federal Reserve raised interest rates for the first time in three years at its September meeting, which hurts banks as they may be faced with higher deposit costs and reduced loan activity.

One bank to watch this earnings season is SoFi Technologies (NASDAQ: SOFI). Here's why.

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Explosion in new members

SoFi is not your typical bank stock; it's a fintech that got a bank charter in 2022 through the acquisition of a small bank, Golden Pacific.

Having a bank charter has allowed SoFi to take deposits and fund its own loans. Previously, it had to work with third-party banks on loans, paying a fee to the partner bank and splitting some of the interest income. This created a drag on revenue and earnings.

So now, SoFi can reduce fees and expenses, which allows it to offer better rates on both loans and deposits.

As an online lender, it doesn't have the physical assets and overhead of traditional brick-and-mortar banks. However, it does have higher marketing and customer acquisition costs, as well as high technology spending, which keeps its margins lower than traditional banks. But its operating margin is improving. In Q2, it was 16.9%, up from 13.1% a year ago this quarter, so that should continue as it matures. The trailing 12-month operating margin was 13.22%, which is also improving.

The better rates and high marketing spend has helped SoFi experience an explosion in new members (customers) and in the products they use. In the most recent quarter, members jumped by 35% to a record 15.8 million members, while products increased 42% to a record 24.4 million.

That kind of growth is hard to match by traditional lenders. That growth could accelerate in the coming quarters as SoFi's widening deposit rate gap could help it attract new customers. On the other hand, higher rates could slow down its loan activity, even though SoFi will likely be able to offer more attractive rates.

A buy leading up to Oct. 27?

SoFi reports its third-quarter earnings results on Oct. 27, and it may be agood idea to add some shares before that date.

One reason is its cheap price. SoFi stock, after three years of major gains, has hit a wall this year, with its stock price down 34% year to date. Part of that was its high valuation, but it also suffered revenue declines within one of the banking-as-a-service tech platforms that it sells to other fintechs to create their own banking operations.

At the end of last year, it lost a major client, Chime (NASDAQ: CHYM), which recently applied for its own bank charter. That caused a revenue hit and contributed to the sell-off.

But SoFi stock is now much cheaper, at 21 times forward earnings, and it raised its revenue guidance for the fiscal year, implying 32% to 35% growth. However, it did not raise its earnings outlook, which caused some concern that expenses may be elevated.

SoFi stock could surge leading up to the earnings date, given its valuation, but then drop as investors sell the news. Investors should proceed accordingly. But I do generally see SoFi as a long-term buy, particularly at this lower valuation. It's just a matter of when to buy.

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