Here's Why SoFi Stock Is a Buy Before Jan. 27

Source The Motley Fool

SoFi Technologies (NASDAQ: SOFI) stock ended 2024 on a high note, rising nearly 55% for the year. That was a huge success for a stock that more than doubled in value (up 116%) in 2023 but then traded in a negative range for the first nine months of 2024. The fintech company gradually proved itself over the course of the year, showing that it was getting more profitable, adding millions of new members, and growing its non-lending services. The icing on the cake was that its lending business, which was what was worrying the market, ended the year in better shape than management expected.

Things appear to be going well for SoFi. If you're considering opening a position, you might want to consider doing so before Jan. 27.

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A powerhouse fintech stock

SoFi is the quintessential fintech, or financial technology, stock. Its easy-to-use mobile app connects customers to a full array of financial services, from bank accounts and lending products to credit cards and investment tools. It's a one-stop shop that allows customers to manage all aspects of their financial lives seamlessly and simply.

SoFi's core (and original) segment is lending, especially to students. But management has followed what it describes as a financial services productivity loop strategy -- attracting new customers with one product, then upselling and cross-selling them to more and higher-priced products. It has two non-lending segments, comprising the financial services segment and the tech platform, which is a financial infrastructure business under the banner Galileo that it acquired in 2020. Management has said its goal for the tech platform is to turn it into the Amazon Web Services of financial services.

The strategy is working. Users engage with SoFi's platform at a high rate, and the non-lending segments continue to grow faster than the lending segment, leading to them accounting for increasingly large shares of the total business. The revenue from these non-lending segments increased by 64% year over year in Q3 and rose from 39% of the total to 49%. Total revenue was up 30% year over year, and SoFi added 756,000 new members. Revenue per product increased from $53 last year to $81 this year.

The non-lending segments are also pulling more of their weight on the bottom line. When SoFi posted its first quarterly net profit in the 2023 third quarter, it mostly came from the lending segment. A year later, all of the segments showed year-over-year growth, and financial services profits are skyrocketing.

Metric Q3 2023 Q3 2024
Lending segment contribution profit $204 million $239 million
Financial Services segment contribution profit $3.3 million $100 million
Technology Platform segment contribution profit $32 million $33 million

Data source: SoFi quarterly reports.

Lending is still responsible for the lion's share of the total gross profits, which is why the market is paying more attention to it than it is to management's hopeful commentary about its expansion strategy. There has been good news on the lending side, too, though. With benchmark interest rates coming down, SoFi's lending segment is improving, and management expects an increase in lending revenue for the full year.

What happens on Jan. 27?

SoFi reports 2024 fourth-quarter earnings on Jan. 27. So far, management has a track record of underpromising and overdelivering. If that pattern persists, the stock could soar after the earnings report.

New investors should also be aware that the market has a history of sending SoFi stock up on good news, but then bidding it back down soon afterward. There's been a lot to unpack in each report. Its member and product add-ons, revenue growth, and profit increases have been uniformly stellar for the past four quarters, but digging deeper, one recognizes that the lending segment has complex reporting including originations, defaults, sales, and income. That's likely why the company looks strong based on a quick survey, but a longer peruse reveals a more nuanced situation. However, after it delivered third-quarter results that assuaged the market's concerns about the lending segment, the stock rose and then stayed up.

SOFI Chart

SOFI data by YCharts

In fact, SoFi stock has gained so much ground since the Federal Reserve began lowering benchmark interest rates in September that it's coming down again as the next quarterly report approaches. This could be an excellent time to buy in. But don't buy it for a short-term boost, and don't worry if the stock reverts to a pattern of retreating after a post-earnings jump. Ride out the waves and let SoFi's long-term opportunity grow your investment.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has positions in SoFi Technologies. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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