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Why is Morgan Stanley bullish on SoFi Technologies' stock?

Shares in fintech SoFi [SOFI] soared earlier this week after Morgan Stanley declared it was the “fastest growth story in consumer finance”.

Morgan Stanley initiated coverage on the company with an overweight rating and a $25 price target on October 11. The SoFi share price rose 17% between the close on 8 October and 12 October to reach $18.97. The share price now sits at $20.99 as of 21 October's close

Other analysts are also bullish. A consensus on Market Screener of eight analysts is a ‘buy’ rating with a $24 average target price.

SoFi allows users to make investments, take out personal and home loans, refinance student loans to a lower rate and deposit money through its app.

“We drove our 8th straight quarter of accelerating member growth, with even faster growth in cross-buying from existing members, increased our Galileo account base to nearly 79 mn, and raised nearly $2 bn in our successful transition to a public company” - Anthony Noto

 

SoFi has doubled its customer base from 1.2mi to 2.6m over the last year, with Morgan Stanley expecting the company to hit 5.3m over the next two years.

“We drove our 8th straight quarter of accelerating member growth, with even faster growth in cross-buying from existing members, increased our Galileo account base to nearly 79 mn, and raised nearly $2 bn in our successful transition to a public company,” said Anthony Noto (pictured above), chief executive of SoFi in October while announcing quarterly earnings.

 

What's so exciting about SoFi?

Morgan Stanley analyst Betsy Graseck was particularly bullish about SoFi’s lending products.

"Lending is the toughest part of consumer finance as you need to understand credit and deliver excellent customer service," Graseck said. “SoFi is is a challenger consumer finance company that is leading with lending; specifically refinancing a high yield student loan into a lower rate.”

The bank likes SoFi’s ability to then cross-sell other financial services such as investing, banking and mortgages to its customers. These cross-buyers now make up a quarter of SoFi's customers.

Morgan Stanley also believes that SoFi's student loan refinancing business is set to boom after the US government ends its COVID-19 deferment programme for student loan payments in February. This will drive a 70% increase in student loan originations in 2022. “Competition is rising among challenger fintechs for Gen Y and Z, but SoFi has a leg up given its roots in lending, along with a robust digital offering,” Graseck said.

“SoFi is is a challenger consumer finance company that is leading with lending; specifically refinancing a high yield student loan into a lower rate” - Morgan Stanley analyst Betsy Graseck

 

Another catalyst for the So-Fi share price would be getting a banking license, which Morgan Stanley expects early next year. “This alone could boost total revenues by 10% in its first full year given benefits to NIM (net interest margin).”

 

Analyst expectations

However, not receiving bank charter approval would be a clear blow to the bullish case, as would increased competition from traditional banks and fintech peers.

SoFi, which has naming rights to the stadium used by the American football teams the Los Angeles Chargers and Rams, listed in June via special purpose acquisition company Social Capital Hedosophia Holdings. It raised $2.4bn at an $8.65bn valuation. Its share price climbed 12.4% on its first day of trading as SOFI — 1 June — hitting $22.65.

In the second quarter, it announced a 113% acceleration in member growth to 2.6m users, and a record quarterly net revenue rise of 101%. However, it posted a loss of $165.3m, down from a net income of $7.8m in the same period in 2020. It also said the student loans market was still depressed, further hitting investor sentiment and the share price.

“The markets may take advantage of investor impatience by accumulating SoFi stock on weakness, expecting that loan refinancing revenue will rebound in future quarters. The company’s growth prospects in fintech did not change” - Chris Lau

 

“The markets may take advantage of investor impatience by accumulating SoFi stock on weakness, expecting that loan refinancing revenue will rebound in future quarters. The company’s growth prospects in fintech did not change,” wrote Chris Lau in InvestorPlace.

Lau said its acquisition of API and payments platform Galileo Financial Technologies last April was positive. “It will continue investing in Galileo technology and already has built a cloud environment in the last year. Now it is transitioning its partners to the platform,” Lau wrote. It would contribute to cost savings that can be ploughed back into the business, Lau added.

Another collaboration was announced on 18 October, when SoFi partnered artificial intelligence software company Pagaya Technologies. SoFi will likely use the AI capabilities to expand its customer lending base.

It has been SoFi, so good for the SoFi share price since its listing. The stock may now be at an inflection point.  

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