Despite recent losses, the tech-heavy NASDAQ index remains up nearly 16% year-to-date. With tech showing solid growth, it’s an opportune moment to explore technology stocks, particularly in specialized areas like fintech.
Fintech lives at the connection between banking and high-tech. Fintech companies provide a wide range of banking services, including saving and checking accounts, lending and borrowing, money management, and even investing – all offered online, even over mobile devices. From the customer perspective, fintechs offer the convenience of banking anywhere, anytime, without the high overhead of maintaining physical branches.
Covering fintechs for Jefferies, 5-star analyst John Hecht noted, “Fintech shares outperformed this quarter, as industry trends and changing rate expectations were net positives. Origination volumes stabilized, lenders remained cautious given elevated (but stable) DQ formation and slowing consumer spending, while funding markets remained favorable for issuers.”
Against this backdrop, we’ve used the TipRanks database to look up the broader market view on SoFi (NASDAQ:SOFI) and Pagaya (NASDAQ:PGY), two of Hecht’s ‘Buy’ choices in his note. The Jefferies analyst is advising investors to buy into these before their upcoming earnings reports; let’s take a closer look, and find out why.
SoFi Technologies
The first fintech we’ll look at is SoFi, which derives its very name from its niche – social finance. SoFi incorporates the interactive online experience of social media into fintech and digital banking.
SoFi is licensed as a bank, and its customers can access the usual banking services, taking out personal, home, or auto loans, establishing credit card accounts, investing money, keeping savings or checking accounts, refinancing, or clearing existing third-party debt such as student loans. The company describes itself as a ‘one-stop shop’ for personal finances and boasts over 8 million members.
The company has funded more than $73 billion in loans for its customers, who have paid off some $34 billion in personal debt and earned over $34 million in personal rewards. As a licensed bank, SoFi is covered by the FDIC, and members’ personal checking and savings accounts are protected up to the standard level of $250,000.
For the first quarter of 2024, SoFi reported a total of 8.132 million members, reflecting a quarterly gain of 622,000 and a 44% year-over-year increase. Although the company’s revenue fell from Q4 to Q1, it still reached just under $581 million, marking a 26% year-over-year increase and surpassing forecasts by over $21 million. SoFi also achieved GAAP earnings of 2 cents per share, exceeding estimates by a penny.
Looking ahead to the upcoming Q2 earnings, we find that most analysts are expecting earnings of $0.01 per share, based on revenue that may approach $566 million. Hitting that revenue level would equate to a 15% year-over-year gain. SoFi’s Q2 earnings call is scheduled for the morning of July 30.
Turning to the Jefferies view, top-rated analyst Hecht writes, “2024 remains a transitional year for SOFI with an overall more conservative lending stance. That said, mgmt is optimistic on the Tech and Money segments and anticipate 20% and 75% growth respectively. Mgmt expects the combined segments with contribute greater than 50% of total revenue in FY24…”
Hecht goes on to outline his views of SoFi’s likely results, and what investors can expect, adding, “Our EPS of $0.01 in line with the Street. We anticipate 2Q24 Adj Net Revenue of $560M, at the midpoint of the guide of $555-565M. This translates to 15% Y/Y growth, driven by growth in loan receivables of ~29% Y/Y coupled with higher yields, along with expected growth out of the tech platform. We are forecasting adj EBITDA of $120M, at the midpoint of the guide of $115-125M, and net income of $6M, which is toward the lower end of the guide of $5-10M.”
These comments inform Hecht’s Buy rating on the stock, and his $12 price target implies a ~61% upside for the coming year. (To watch Hecht’s track record, click here)
The rest of the Street is less confident, however; based on 4 Buys, 9 Holds, plus 3 additional Sells, the stock has a Hold (i.e. Neutral) consensus rating. The shares are selling for $7.47, and the $8.15 average price target suggests that the stock has a one-year upside potential of 9%. (See SOFI stock forecast)
Pagaya Technologies (PGY)
The second fintech on our radar now is Pagaya, a company that is applying AI technology to the credit system. In short, Pagaya uses AI and machine learning methodologies, along with big data analytics, to offer institutional lenders new, more accurate ways to review credit applications. The company works with a wide range of financial institutions, including banks, pension funds, and insurance companies, applying data-driven decision-making to improve people’s access to credit.
At its heart, Pagaya aims to fill in the blind spots that legacy underwriting systems aren’t seeing. The company has an AI network that analyzes credit applications – and credit applicants – to give a more precise evaluation of risks for better risk management. The company, which was founded in 2016, operates internationally, with an array of 30 partners, and employs more than 600 people – including top-level data researchers. Since its inception, Pagaya has reviewed approximately $2 trillion worth of credit applications.
Shares in Pagaya have been falling over the past year; the stock is down 45% in the last 12 months. At the same time, Pagaya’s revenues have been on an upward trajectory in the past several quarters. The company’s revenue in 1Q24 came to $245 million, up 31% year-over-year and $17.23 million ahead of the estimates. The company’s bottom line, the non-GAAP earnings of 20 cents per share, was 4 cents better than had been expected. In other positive metrics, the company’s Q1 network volume was a company record, of $2.42 billion, and the $20 million in cash flow from operations marked the third quarter in a row of positive cash generation.
Forecasters are predicting that Pagaya will show $239 million in revenue during Q2, with an EPS of 28 cents per share. The Q2 results are expected for release on August 9.
For Hecht, a key point here is Pagaya’s recent growth. He says of the fintech company, “Pagaya remains on a strong growth trajectory. Management has reiterated their plan to add 2-4 new lending partners yearly. Areas of growth include its auto and POS businesses, and we anticipate PGY will lean into them as the year progresses. Into the quarter, investors’ focus remains on the company’s FV marks and capital efficiency (regarding increasing ABS retention).”
Going on, the analyst adds of Pagaya’s likely Q2 results, “For the quarter we’re forecasting adjusted EPS of $0.29 versus the Street’s adjusted EPS forecast of $0.24… We’re forecasting a network volume of $2.3B, the midpoint of the company’s guidance for the quarter. Our total revenue and other income forecast of $237.9M is aligned with the Street’s $238.9M and within the company’s guidance for the quarter… Our 2Q24 adjusted EBITDA forecast is $42.7M, which is within the guide, and our FY24 forecast remains at $173.5M.”
Along with this upbeat outlook, Hecht puts a Buy rating on PGY shares, with a $30 price target that points to room for a robust 109% gain in the coming months.
All in all, the Street rates PGY as a Moderate Buy, based on 7 reviews including 5 Buys and 2 Holds, and the average price target of $23.17 suggests an upside of 58% on the one-year horizon. (See PGY stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
