Opinion: This is Cathie Wood's best stock under $10

Ark Invest's Cathie Wood has gained a large following thanks to her conviction in emerging markets such as biotech and artificial intelligence (AI).

However, it also holds some investments in companies in less innovative sectors.

So let's take a look at the fintech company SoFi Technologies (SOFI 5.62%)which I believe is a rare example of a stock in the Ark portfolio where the share price and underlying fundamentals are unrelated. With SoFi shares trading for less than $8, I consider SoFi to be Wood's best stock under $10.

A new variant of financial services

Banking, opening a brokerage account, and purchasing insurance are among the most common examples of financial services. Although some companies may offer all or a combination of these services, I wouldn't be surprised if you hired a different company for each of these products. For example, maybe you have a mortgage Wells Fargo But invest your money through Charles Schwab and have car insurance with Geico.

Although this structure can work, a drawback is its inefficiency. It can take days to transfer money from your savings at Wells Fargo to an investment account at Schwab. Additionally, if you have a customer service need and cannot resolve it over the phone, you will likely have to go to a brick-and-mortar location and wait in line. This can be a time-consuming and frustrating process.

SoFi has redefined the concept of financial services. The company offers a range of credit and banking products as well as insurance policies and investment options on an online platform.

Building a one-stop shop with a variety of financial services allows SoFi to efficiently cross-sell additional products to users. The company calls this strategy the “financial services productivity loop,” and it’s working.

While lending is SoFi's largest source of revenue, its other products are growing faster. At the end of the second quarter, SoFi's total financial services products to total lending products ratio was approximately 6:1.

As SoFi builds stronger unit economics across its user base, the company is able to allocate capital more efficiently – leading to profitability.

SOFI net income data (quarterly) from YCharts.

What could hurt SoFi stock?

As of this writing, SoFi stock is down 26% since its initial public offering (IPO).

I think a lot of the sell-off is due to the competitive landscape. Many skeptics see SoFi as nothing more than a small start-up bank that will never be able to compete effectively with larger incumbents. This perspective is similar to the pessimistic investors who have pondered it Tesla just a car company – a narrative that has been proven false, but admittedly took some time to materialize.

Another reason for the negativity towards SoFi stems from this How The company went public in 2021. SoFi chose to merge with a publicly traded special purpose acquisition company (SPAC) as opposed to a traditional initial public offering (IPO) with an investment bank.

According to a University of Florida study, SPACs have rarely been good long-term investments. For example, the median return for SPACs in the financial services sector between 2009 and 2024 is dismal Negative 65%.

The final variable that has weighed on SoFi stock in recent years is the Federal Reserve's 11 rate hikes. Simply put, higher borrowing costs have weighed on SoFi's lending business.

Image source: Getty Images.

Is SoFi stock a buy right now?

I admit that valuing SoFi stock is quite a challenge. While looking at the price-to-book ratio (P/E) can be helpful, I believe it is a more appropriate tool for valuing traditional bank stocks. Additionally, since SoFi's transition to profitability is still relatively new, I don't think its price-to-earnings (P/E) ratio makes complete sense yet.

I think SoFi needs to be viewed using a sum-of-the-parts (SOTP) valuation method. A SOTP model looks at each segment of a company individually and applies a valuation multiple to that specific operation.

Considering that SoFi operates in so many different verticals in financial services, I think the company's different business segments and their growth prospects need to be analyzed individually – and I see some obvious catalysts on the horizon.

The Fed has finally started cutting interest rates. I think this will help revive growth in SoFi's lending business, which should contribute to the company's profitability. Additionally, SoFi is likely to end up with higher profit margins than legacy financial services companies as it expands its technology-enabled services. That should support a premium rating.

I think SoFi is misunderstood and the low stock price reflects an inaccurate representation of the company.

While valuing SoFi using traditional metrics is challenging, it's hard to overlook a company that is disrupting multiple markets and doing so in a profitable way. When you consider the company's catalysts in lending and its growth in other areas outside of lending, it becomes even more difficult to assess SoFi's future growth prospects.

To me, SoFi stock is a bargain at under $8, and I think now is a lucrative opportunity to add to it and hold it for the long term.