Macro conditions could improve thanks to central bank rate cuts.
Shares of SoFi Technologies (SOFI -0.24%) have been on an unbelievable run. During the past year, they have soared 166% (as of Oct. 17). The tech heavy Nasdaq Composite is up 24% during the same period.
SoFi has been putting up strong financial results. And the market has noticed, viewing the business in a much more optimistic light.
This fintech stock is now trading not far from record territory, so investors might think it’s too late to put some money to work. But that’s a flawed perspective. Here’s one reason now is a great time to buy SoFi.
SoFi should benefit as rates start to come down
Last month, the Federal Reserve lowered its benchmark fed funds rate. This was the first reduction since December 2024.
Market watchers have been waiting for such a move, as the central bank aims to boost the labor market. Investors expect the Fed will lower the rate two more times before the year is over.
Generally speaking, lower interest rates are good for the economy. They can drive consumer spending and business investment since it becomes cheaper to borrow capital. Consequently, a bank like SoFi can benefit greatly.
It is already growing rapidly. During the second quarter, its revenue surged 43%, with the business adding 846,000 net new customers. Despite a prolonged period of above-average interest rates, SoFi has still been expanding at a brisk pace. The potential for lower interest rates can supercharge that growth.
In the second quarter, the bank originated $8.8 billion worth of loans (combined among personal, student, and home). That figure was up 64% year over year. Besides interest income, the business collects fees for originations. And lower interest rates, unsurprisingly, can jump-start loan originations, which have already been growing at a fantastic clip.
This same situation can help the banking industry as a whole. On the flip side, though, investors need to pay attention to risks. Lower interest rates might spur demand from borrowers to take out loans. However, this can increase default risk on a lender’s balance sheet.
To its credit, SoFi has done a good job targeting a more affluent demographic. For instance, the company’s personal-loan borrowers have a weighted-average income of $161,000 and a weighted-average Fair Isaac FICO score of 743. They should be better able to make their loan payments.
“The health of our consumer remains strong, and we’re not seeing any signs of weakness,” Chief Financial Officer Chris Lapointe said during the second-quarter earnings call.
The business is poised to continue growing its profits
A reduction in interest rates can not only help SoFi generate more revenue, but it can also increase the company’s profits. It first became profitable on the basis of generally accepted accounting principles (GAAP) in the fourth quarter of 2023. Since then, the bottom line has expanded in an impressive fashion.
In 2024, SoFi reported $227 million in adjusted net income; management expects the company will post $370 million in 2025. And Wall Street analysts on average anticipate earnings per share will increase 77% in 2026 and 36% in 2027.
This is a very exciting outlook for shareholders. It highlights that SoFi operates with a very scalable business model, which is helped by the fact that it doesn’t carry the overhead of physical bank branches. It would make sense that SoFi’s earnings would grow at a faster clip than the top line.
And that can continue driving the stock higher. Value investors might hesitate, with the shares trading at a forward price-to-earnings (P/E) ratio of 47. However, don’t ignore the incredible trajectory that SoFi is on. It’s easy to be confident that the stock will do well over the long run given a more accommodative interest-rate environment that can push profits up.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.