At its meeting yesterday, the U.S. Federal Reserve lowered rates by 50 basis points which led to mixed reactions. Broader markets jumped after the first rate cut in over four years, before the S&P 500 Index ($SPX) and Dow Jones Industrial Average Index ($DOWI) pared gains to close Wednesday in the red, as a section of the market fears that the 50-basis point rate cut - which the Fed has historically reserved for macro shocks like the COVID-19 pandemic in 2020 and the 2007-2008 Global Financial Crisis - highlights worries about the U.S. economy.
Fed Cuts Rate by 50 Basis Points
However, Powell tried to allay such fears, and said, “I don’t see anything in the economy right now that suggests that the likelihood of a recession, sorry, of a downturn, is elevated.” He also virtually ruled out more 50-basis point rate cuts, stressing that the U.S. central bank is not in a “rush.”
To me, Powell's comments signal that the Fed still expects a soft landing for the U.S. economy – which many previously saw as a Goldilocks scenario. On the 50-basis point rate cut, I believe the Fed was behind the curve, and with the 50-basis point cut it has now caught up with the macro realities, as well as central bank actions in other developed economies. Investors seem to agree, with stocks surging to new records in today's session.
To sum it up, the Fed should now gradually cut rates – even as Powell signaled that days of ultra-cheap money are not coming back. As for the economy, while it is slowing down, the slowdown does not look worrying, and the Fed’s rate cuts should help spur growth in the world’s largest economy.
The base-case economic scenario looks positive for the broader markets, as well as many specific stocks – like fintech giant SoFi (SOFI), for instance. With a YTD loss of over 16%, the Cathie Wood stock is underperforming the broader markets. Here’s the investment thesis for SoFi after the Fed’s rate cut.
SoFi Could Benefit from Fed Rate Cuts
SoFi was traditionally a lending platform, and seven years back, nearly all of its revenues came from that business. It has since diversified, and has been focusing on the Tech Platform and Financial Services segments. These two segments accounted for 38% of its revenues in 2023, and the contribution rose to 45% in Q2.
The fintech company's growth in recent quarters has been led by these segments, whose collective revenues rose 46% in Q2, while the adjusted revenues of its Lending business rose by a mere 5%. SoFi expects its 2024 lending revenues to be at least 95% of 2023 levels, as it deliberately soft-pedaled that business amid high interest rates and fears of higher delinquencies. As the Fed embarks on its rate cuts and macro concerns ease, SoFi might yet again double down on lending, which remains its biggest revenue driver.
Management expects interest rate cuts to benefit its home loan lending, home equity loans, and purchase loan businesses. SoFi CEO Antony Noto tried to dispel fears that it won't be able to maintain high annual percentage yields (APYs) as interest rates fall. First, he said that the company will be able to maintain rates higher than its peers due to its origination platform.
He added, “As rates go down, the value of our loans generally go up, all else equal, and so we can maintain a superior APY.” Notably, SoFi expects to maintain net interest margins (NIMs) of over 5% in the foreseeable future, which looks quite healthy.
SoFi Continues to Grow at a Fast Pace
Despite the slowdown in its lending business, SoFi continues to grow at a fast pace, with revenues rising 22% YoY in Q2.
Its member count has also been growing rapidly, and the company added 643,000 members in Q2, with 8.8 million members at the end of the quarter. For context, the company’s member count was a mere 1.08 million at the end of Q1 2020. Cross-selling to these members is a key growth driver for SoFi, and during the Q2 earnings call, it said that almost 30% of new members add a new product within the first 30 days.
SoFi Stock Forecast
Meanwhile, Wall Street isn't too bullish on SoFi, and the stock has a consensus rating of “Hold” from the 18 analysts in coverage. It has a mean target price of $8.96, which is 10.5% higher than Wednesday’s closing prices.
However, I find SoFi a good stock to buy on the assumption of a stable economy and employment situation in the U.S. Also, if the economy improves and recession fears subside, SoFi has the bandwidth to increase its lending business, which can further increase its growth. SoFi’s next 12-month (NTM) price-to-earnings (P/E) multiple of 49x might appear elevated, but that’s because it only became profitable on a GAAP basis in Q4 2023.
The company has guided GAAP earnings per share (EPS) to range between $0.55-$0.80 in 2026. Management further expects GAAP EPS to rise between 20%-25% post-2026, as well. The stock currently trades at just over 10x the top end of its 2026 EPS guidance, which doesn't look too demanding.
Overall, SOFI stock looks like a good buy as the Fed gradually cuts rates, which will help stabilize the U.S. economy - a scenario that bodes well for the fintech company's business.
On the date of publication, Mohit Oberoi had a position in: SOFI . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
