Still moving lower, it’s debatable whether SoFi Technologies (NASDAQ:SOFI) is about to bottom out. On one hand, it’s easy to see it moving lower. The factors that started to push SOFI stock and similar plays lower in November remain in play.
On the other hand, after hitting a new 52-week low, the fintech firm’s shares may be finding support. Key developments that could help drive back to prior price levels may be just around the corner. With this, now may be the time to buy.
Especially as, while the near-term is uncertain, the long-term still appears to bode well for SoFi. As it grows its user base, and expands its financial product offerings? It has a solid chance of becoming the next Block (NYSE:SQ) or PayPal (NASDAQ:PYPL). Both of which sport valuations well above the market capitalization of this fintech rising star ($11.4 billion).
Sure, more news from the U.S. Federal Reserve about its rate hike plans could put even more pressure on growth stocks. That may push it lower from here. Yet weighing this long standing multiple compression risk, against its many positives? Buying a bit now, and more if it heads lower, may be the way to go.
SOFI Stock and the Risk This ‘Cheap’ Fintech Play Becomes ‘Cheaper’
Down big from its highs, and falling back towards its initial offering price, this former special purpose acquisition company (SPAC) is getting to a point where many consider it a cheap growth play.
With its revenue expected to rise by 44.6% this year, SOFI stock, despite its high price-to-sales ratio (11.1x), and the fact it’s still operating in the red, may be a bargain. When growth stocks get out of their slump, the bulls assume shares will make a bolt back to $15, $20, or even to its high-water mark of $28.28 per share.
However, when growth stocks will come back in vogue is debatable. Growth stocks are under pressure due to the Fed’s plans to raise interest rates three times in 2022. The latest Fed minutes even suggest that rates could rise sooner and faster than previously expected. Rising rates is bad news for all stocks, but it’s worse news for growth stocks, as a recent article in Barron’s recently discussed.
When interest rates go, so too does the discount rate. Low discount rates are what have enabled growth stocks to trade at historically high valuations. Yet if this discount rate goes up, it may result in a further decline for these types of plays. Like I’ve argued in past coverage, that’s the main risk with this fintech stock. Still, this factor by-itself does not make investing in it now a no-go.
Why its Many Positives Could Outweigh its Key Negative
Further multiple compression may threaten to send SOFI stock, at around $13.75 per share today, down to single-digit price levels. But even if it does fall to under $10 per share, that doesn’t necessarily mean it’ll stay there.
First, while interest rates are going up, it may not be as dramatic as some more bearish commentators suggest. The Fed may wind up raising rates at a pace that both fights inflation, and prevent growth stocks from experiencing a hard landing. Second, if rising rates only has a minimal impact from here on stocks, SoFi’s many positives may help to more than outweigh this key negative.
These positives include upcoming catalysts. For example, the approval of its national bank charter. This will enable this “disruptor” to better compete with old-school financial institutions. Another example is the end of the student loan moratorium in May. Admittedly though, given that the moratorium was originally slated to end this month, then was extended, there is the risk it gets extended again.
On a longer time horizon, SoFi’s key positive is the potential for it to continue growing its user base, enabling it to join the ranks of Block (formerly Square) or PayPal. If the level of downside risk from rising interest rates is overblown, and these catalysts/trends play out? A trip down to single-digit prices for SOFI stock may be a short one.
The Verdict: Keep an Eye on SoFi Technologies
As what’s pushing growth stocks lower (anticipation of higher interest rates) stays in play, it may be a while before SoFi starts to bounce back. It may continue to move lower, finding a new floor instead of bouncing back after falling down to $13-$14 per share again.
Nevertheless, you should keep an eye on SOFI stock. Long-term upside potential continues to outweigh near-term downside risk.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.