Cathie Wood is perhaps best known for her bullish positions on Tesla Or Palantirbut recently, the outspoken investor has quietly built a position in an up-and-coming fintech player SoFi Technologies (NASDAQ:SOFI).

Currently, SoFi is Wood’s fourth largest holding in its portfolio. exchange traded funds (ETF) – and she’s not the only one on Wall Street who remains optimistic. Dan Dolev, Equity Research Analyst Mizuho recently raised its price target on SoFi to $14 per share, implying a 36% upside from Oct. 29 trading levels.

Below, I’ll dig deeper into SoFi’s most recent earnings report and explain why I see several tailwinds that could generate further gains for investors.

Another good quarter for SoFi

On the surface, I wouldn’t blame you if you view SoFi as a problematic investment opportunity. The financial services industry is incredibly crowded and it makes sense that smaller players simply don’t have adequate distribution resources to compete with incumbent players such as Wells Fargo, Bank of AmericaOr JPMorgan Chase.

But in recent years, online newcomers have begun to disrupt banks and other traditional financial intermediaries. Companies such as Robinhood Markets, Global CoinbaseAnd Block have carved out their own pockets, dominating areas such as crypto investing, small business lending, and even stock trading.

SoFi, for its part, has joined its cohorts above and established itself as a star in digital banking. Unlike Wells Fargo and other major banks, SoFi does not have brick and mortar locations. Instead, the company offers services such as loans, insurance, banking and investments online through its app.

Online banking is becoming more prevalent and SoFi is leading the charge. For the quarter ended September 30, SoFi had 9.4 million members on its platform, a 35% year-over-year increase. What’s even better is that its members use over 13.6 million products. This implies that each SoFi member uses an average of 1.5 products, underscoring the company’s ability to sell additional services to users.

The lucrative opportunity for SoFi is that the company is quietly building a one-stop shop for a multitude of financial needs, which should lead to more efficient unit economics in the long term.

During the third quarter, SoFi’s revenue increased 30% year over year to $689 million and generated net income of more than $60 million, its fourth consecutive quarter of profitability .

Image source: Getty Images.

Why the future looks bright

It’s pretty clear to me that SoFi’s approach to building a robust financial services operation is paying off. And while rising revenue and steady earnings have become a staple of SoFi’s earnings reports, I think investors should keep in mind that the journey is only just beginning.

SoFi’s largest source of revenue comes from its line of lending products. However, high interest rates in recent years have held back SoFi’s lending segment.

There are a few important points to make about interest rates. First, despite slow growth in SoFi’s largest revenue source over the past two quarters, the company still managed to generate modest profitability. It achieved this by generating growth from non-lending products. This development supports the idea that SoFi’s user base is becoming increasingly dependent on the platform and using the app for more than just one of their financial needs.

Secondly, I think The Federal Reserve will continue to cut rates after its reduction in September. The 50 basis point reduction (0.5%) has already rejuvenated SoFi’s lending business. During the third quarter, SoFi generated $392 million in lending revenue, a 15% year-over-year increase.

If the Fed continues to cut rates, I think SoFi’s lending business will continue accelerate. In turn, I believe the company is able to grow its profits and become an even stronger financial company.

An overview of SoFi’s valuation

As I’ve written before, evaluating SoFi’s performance intrinsic value is a real challenge at this stage of the business life cycle.

I don’t find the price-to-book (P/B) ratio typically used to value banks entirely credible, because SoFi is much more than a traditional bank. However, despite the company’s profitability, its net profit remains quite modest and so I also don’t think profit-based metrics are appropriate at this stage.

To me, SoFi is more of a technology service that is transforming into a ubiquitous platform offering users a variety of different financial services. This is why I think SoFi should be valued using a sum of parts methodology (SOTP).

As SoFi’s products beyond lending continue to grow, the company should begin to report widening margins and further growth in earnings and cash flow. In turn, I think it would be appropriate to value SoFi based on multiples associated with technology and software companies, as opposed to the lower multiples typically used to value banks.

For these reasons, I agree with Wood’s bullish stance and Dolev’s expectations for more gains in SoFi stock. Now is a great time to buy stocks and hold them for the long term as SoFi enters a new phase of growth supported by its growing customer base, accelerating revenues and rising profits.

Should you invest $1,000 in SoFi technologies right now?

Before buying SoFi Technologies stock, consider this:

THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and SoFi Technologies was not one of them. The 10 stocks selected could produce monster returns in the years to come.

Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $813,567!*

Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.

See the 10 values ​​»

*Stock Advisor returns October 28, 2024

Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Adam Spatacco holds positions in Block, Coinbase Global, Palantir Technologies, SoFi Technologies and Tesla. The Motley Fool holds positions and recommends Bank of America, Block, Coinbase Global, JPMorgan Chase, Palantir Technologies and Tesla. The Motley Fool has a disclosure policy.