Financial institutions make money by managing risk, which is a key aspect for banks of all sizes. While defaults are unavoidable, unhealthy underwriting practices can severely impact balance sheets and force financial institutions into troubled waters.
That brings us to SoFi (NASDAQ:SOFI), an online financial services company whose shares have dropped 35% this year due to concerns about its loan portfolio. Notably, about 18% of SoFi shares are held in short positions, indicating investor skepticism about the company’s risk management.
However, Noah’s Arc Capital Management argues that concerns over the quality of SoFi’s loan portfolio are misplaced.
“The company is cognizant of the loan environment and is managing this well,” the investor opined.
Noah’s Arc highlights that personal loan default rates did not increase in 1Q24, remaining consistent with Q4 2023 levels. Additionally, SoFi requires a relatively high FICO score of at least 680 for loan approval, underscoring its prudent risk management practices.
Furthermore, for 1Q24, new direct deposit customers made up 90% of the record $3 billion in new deposits. Direct deposit customers possessed a median FICO score of 744, which is considered a prime credit rating.
“I believe this indicates their customers are part of a high-quality borrower base, one that is more reliable when it comes to paying off loans,” writes Noah’s Arc, who also notes that in contrast to SoFi, deposits are falling at many other financial institutions.
Moreover, the investor is bullish about SoFi’s expected EPS and revenue growth over the coming decade. SoFi expects EPS growth of 20 times current levels, while revenues are projected to more than double to $6.81 billion by 2033.
In another indication that SoFi is moving in the right direction, the CEO continues to accumulate shares, purchasing almost $800,000 worth of stock this year alone.
Quoting investment guru Peter Lynch, Noah’s Arc writes that “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
“Seeing a clear path for shares to rebound,” Noah’s Arc rates SoFi shares a Strong Buy. His fair value estimate of $9.81 implies a ~48% upside from current levels. (To watch Noah’s Arc’s track record, click here)
Wall Street analysts, however, are not as optimistic as Noah’s Arc. SoFi holds a Hold (i.e. Neutral) consensus rating based on 4 Buy, 9 Hold, and 3 Sell ratings. Yet, the average 12-month price target of $8.35 represents a potential rise of ~26%. (See SOFI stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
