Cathie Wood of Ark Invest has garnered a large following thanks to her conviction in emerging markets, such as biotechnology and artificial intelligence (AI).
But she also holds some investments in companies in less-cutting edge industries.
So let's explore fintech company SoFi Technologies (NASDAQ: SOFI), which I think this is a rare example of a stock in Ark's portfolio where the share price and the underlying fundamentals are disconnected. With shares of SoFi trading at less than $8, I see SoFi as Wood's best stock under $10.
A new spin on financial services
Banking, opening a brokerage account, and buying insurance are some of the most common examples of financial services. Although some businesses may offer all or a combination of these services, I would not 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 have auto insurance with Geico.
Although that structure can work, one drawback is inefficiency. Wiring money from your savings at Wells Fargo to an investment account at Schwab can take days. Moreover, if you have a customer service need and can't resolve it over the phone, you likely need 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 number of lending and banking products, as well as insurance policies and investing capabilities, all on one online platform.
Building a one-stop shop featuring a variety of financial services lets SoFi cross-sell additional products efficiently to users. The company refers to this strategy as a "financial services productivity loop," and it's working.
While lending is SoFi's largest 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 roughly 6:1.
As SoFi builds stronger unit economics across its user base, the company is able to allocate capital more efficiently -- leading to profitability.
What could be hurting SoFi stock?
As of the time of this article, SoFi stock is down 26% from its initial public offering (IPO).
I think much of the sell-off 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 incumbents. This perspective is not unlike bearish investor who considered Tesla just a car company -- a narrative that has been proven incorrect but admittedly took quite some time to achieve.
Another reason for negativity about SoFi traces back to how the company went public in 2021. SoFi opted for merging 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 study at the University of Florida, SPACs have rarely been good long-term investments. For example, between 2009 and 2024, the median return for SPACs in the financial services sector is a dismal negative 65%.
The last variable that's weighed on SoFi stock during the past couple of years is the 11 interest rate hikes by the Federal Reserve. Simply put, higher borrowing costs have taken a toll on SoFi's lending business.
Is SoFi stock a buy right now?
I'm going to admit that valuing SoFi stock is pretty challenging. Although the price-to-book (P/B) ratio can be helpful to look at, I find that this is a tool better used to value 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 entirely useful just yet.
I think SoFi needs to be viewed through a sum-of-the-parts (SOTP) valuation methodology. A SOTP model looks at each segment of a business individually and applies a valuation multiple to that specific operation.
Considering SoFi operates across so many different pockets within the financial services realm, I think the company's various business segments and their growth prospects need to be analyzed individually -- and I see some obvious catalysts on the horizon.
The Fed has finally started cutting interest rates. I think this will help revive growth in SoFi's lending business, which should add to the company's profitability. Furthermore, as SoFi builds its tech-enabled services, it should end up with wider profit margins than legacy financial services firms. That should support a premium valuation.
I think SoFi is misunderstood, and its depressed stock price reflects an inaccurate narrative about the company.
While valuing SoFi using traditional metrics is a challenge, it's hard to overlook a company that is disrupting multiple markets and doing so in a profitable way. When you layer the company's catalysts in the lending business and account for its growth in other areas outside of lending, it becomes even harder to discount SoFi's future growth prospects.
To me, SoFi stock is a steal at less than $8, and I think now is a lucrative opportunity to load up and hold for the long run.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Adam Spatacco has positions in SoFi Technologies and Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2024 $77.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.
Opinion: This Is Cathie Wood's Best Stock for Under $10 was originally published by The Motley Fool