It’s not been a pretty few months for US growth stocks. This is due to the rising rates of inflation, and the interest rate hikes that are expected to follow. As such, it’s likely to become more expensive to issue debt, a factor which may stunt growth. Fintech company SoFi Technologies (NASDAQ: SOFI) has not been immune to this sell-off and has fallen 40% since its highs in November. But according to Wall Street, the upside potential of this stock is immense. Here’s why.
The bank charter
Yesterday, SoFi announced that it had obtained a bank charter, and this saw the shares rise around 15% on the day. There are a few reasons why the bank charter should prove so beneficial for SoFi. Indeed, until this moment, SoFi has relied on partnerships with banks to hold customer deposits and issue loans. Nonetheless, with the bank charter, it means that there is no need for these intermediaries, and SoFi will be able to boost profits from its lending business. It will also allow the fintech to add more financial products and services, in a bid to attract more users.
This move has been welcomed by Wall Street. In fact, analysts believe that the bank charter will lower the company’s cost of capital and boost earnings. This led to Rosenblatt upping its price target for the growth stock from $28 to $30. At SoFi’s current price, this implies more than 100% upside. In its bullish case, Morgan Stanley strategists Betsy Graseck and Jeffrey Adelson have also placed a $28 price target on the stock, also implying 100% upside. Therefore, it’s clear that Wall Street are very optimistic about the outlook for this growth stock.
My views
As an owner of SoFi stock, I’m also very optimistic. Indeed, growth at the company has been extremely strong, and in the Q3 trading update, it announced that it had nearly 3m members. This is a 96% year-on-year increase. FY2021 revenues are also expected to reach over $1bn, which is a 60% year-on-year increase. The bank charter will hopefully propel this growth further.
There are some risks though. For example, while the bank charter creates several opportunities, it will also come with more regulatory oversight. This may see the company’s crypto activity pull back, which could have a damaging impact on revenues and growth. Further, the fintech sector is very competitive, and SoFi remains small compared to PayPal and Block. Finally, the current rates of inflation are having very damaging effects on all growth stocks, this may continue to depress investor sentiment towards SoFi.
Can this growth stock soar?
I’m inclined to agree with Wall Street, and I feel that SoFi has significant amounts of upside potential. While it does remain expensive, with a price-to-sales ratio of around 10, I feel that its excellent growth justifies this valuation. I can also see a route to profitability, especially with the addition of the bank charter. Therefore, I may continue to add more SoFi shares to my portfolio.
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Stuart Blair owns shares in PayPal Holdings and SoFi Technologies. The Motley Fool UK has recommended Block, Inc. and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
