Digital banking products are rising in popularity, and SoFi is uniquely positioned to capitalize on this trend.
For several decades, the banking industry was largely comprised of brick-and-mortar financial institutions that take care of your financial needs — from lending to financial planning, savings accounts, and more.
In recent years, however, a number of companies have sought to disrupt legacy banking incumbents by digitizing the financial services experience. One company pioneering this movement is SoFi Technologies (SOFI -2.98%).
SoFi has built a one-stop shop with a digitally native platform that offers customers a variety of financial products. With 10.9 million users on the platform, accelerating revenue, and widening profit margins, SoFi has emerged as one of the hottest names in the fintech sector.
While shares have surged by 42% so far this year, I still see SoFi stock as a screaming buy. Let’s explore two tailwinds that could further strengthen SoFi’s business in the long run, making it a compelling opportunity right now.
One of the services that SoFi offers through its app is investing in the capital markets. For some time, the company parlayed this feature by allowing users to invest in the cryptocurrency market as well.
However, the crypto industry has long been plagued by an uncertain regulatory environment. Moreover, there were some arguments to be made that speculative assets such as crypto did not fully align with SoFi’s other traditional financial services. For these reasons, SoFi eventually ended its crypto offerings.
Per a recent announcement, the company is now doing a 180, and SoFi is reentering the crypto landscape. I think there are a few driving factors behind SoFi’s decision to get back into crypto.
First, Robinhood has made a cognizant decision to make crypto a core part of its ecosystem. Around the same time as SoFi’s crypto announcement, Robinhood revealed to investors that it is offering tokenized stocks in certain geographic regions.
Given that Robinhood and SoFi both appeal to younger demographics, I don’t find the timing of each company’s crypto announcements to be coincidental. Simply put, SoFi cannot afford to miss out on the broader crypto opportunity and cede this business to Robinhood.
In addition, other neobanks such as Chime compete head-to-head with SoFi in that they offer many of the same basic lending and investment services. I see SoFi’s decision to offer crypto products as more than a simple differentiator from competing platforms.
Lastly, SoFi’s bank charter gives the company an edge over other digitally native financial services businesses. As a bank, SoFi’s crypto infrastructure goes well beyond trading. For instance, the company has the financial flexibility to explore areas such as stablecoins, digital asset lending, and other tools that use blockchain technology.
By introducing crypto to the SoFi ecosystem, the company now has even more opportunities to drive cross-selling among its existing users, and use these new services as a source of strategic customer acquisition. Ultimately, SoFi’s new crypto initiative helps set the stage for even further growth down the road.
SoFi’s bread and butter is its lending platform, which accounts for more than half of the company’s net revenue. While the Federal Reserve’s decisions pertaining to monetary policy remain under tight wraps, many economists are forecasting another interest rate cut in the not-too-distant future.
At first glance, a reduction to interest rates may appear to be a headwind for SoFi. Such a move would compress margins and potentially stifle profitability. However, SoFi is far more diversified and not entirely reliant on lending products.
If the Fed does reduce rates, I wouldn’t be surprised to see a resurgence in refinancing activity across its student, business, and mortgage loan operations. Lower rates may also inspire an uptick in consumer spending and borrowing activity. These dynamics allow SoFi to parlay its lending services as a gateway into other products across its financial ecosystem.
The big idea here is that reducing interest rates should free up liquidity from consumers, which can then be redeployed into other areas such as investing. So while lower net interest spreads can lower the unit economics on a per-loan basis, SoFi has a unique opportunity to still boost profitability by keeping users engaged and offering them a host of other financial services — ultimately laying the foundation for sustained, long-term growth.
