Aggressive interest rate hikes have been one of the key reasons why the stock market has been under pressure since the beginning of the year. Despite the Fed’s hawkish stance, inflation has persistently hovered around the multi-decade high level.
The stubborn inflation led to the Fed hiking the benchmark interest rate by 75 basis points last month for the third consecutive time. However, September’s consumer price index (CPI) rose 0.4% sequentially, beating economists’ estimates. So, the market expects the central bank to announce another aggressive rate hike in its next meeting.
While most industries suffer from a rising interest rate environment with surging borrowing costs affecting their bottom line, financial companies usually benefit from it as it helps them expand their revenues. Higher interest rates typically lead to a rise in the net interest income of financial companies.
Although the rising interest rate environment benefits financial services companies, the collapse of risky assets, such as cryptocurrency, has proven to be a major dampener for several companies having significant exposure to them. The largest cryptocurrencies, bitcoin and Ethereum, have declined more than 55% year-to-date.
Similarly, higher interest rates also impact the demand for loans as it becomes more expensive to borrow money. So, companies dealing with loans suffer from a rising interest rate environment.
Therefore, it could be wise to avoid fundamentally weak financial services stocks SoFi Technologies, Inc. (SOFI), Upstart Holdings, Inc. (UPST), and Marathon Digital Holdings, Inc. (MARA), which are either exposed to cryptocurrencies or deal with loans.
SoFi Technologies, Inc. (SOFI)
SOFI is a digital financial services company. It operates through the lending, financial services, and technology platform segments. The company’s lending segment offers student loans and personal and home loans.
The financial services segment provides cash management and investment services through SoFi Money, SoFi Invest, SoFi Credit Card, and SoFi Relay. Its technology platform segment offers the benefits of Galileo and Apex.
SOFI’s non-interest expense increased 15.5% year-over-year to $458.24 million for the second quarter that ended June 30, 2022. The company’s total liabilities for the quarter ended June 30, 2022, came in at $7.16 billion, compared to $4.48 billion for the fiscal year ended December 31, 2021. Its net loss and loss per share came in at $95.84 million and $0.12, respectively.
Analysts expect SOFI’s loss per share for the current quarter to widen 100% year-over-year to $0.10. Over the past year, the stock has declined 75.5% to close the last trading session at $4.81.
SOFI’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an F grade for Stability and Quality and a D for Growth, Value, and Momentum. Within the F-rated Financial Services (Enterprise) industry, it is ranked #101 out of 103 stocks. To see the rating of SOFI for Sentiment, click here.
Upstart Holdings, Inc. (UPST)
UPST is a leading artificial intelligence (AI) lending platform that helps access affordable credit while reducing its bank partners' risk and cost of lending. Its platform utilizes advanced machine learning tools to accurately gauge the risk and approve more applicants than traditional, credit-score-based lending models.
UPST’s loss from operations for the second quarter ended June 30, 2022, came in at $32.11 million, compared to the income from operations of $36.30 million in the year-ago period. The company’s total operating expenses increased 65.1% year-over-year to $260.27 million. Its adjusted EBITDA declined 90.7% year-over-year to $5.51 million. In addition, its adjusted net income fell 98.3% year-over-year to $965K. Also, its adjusted EPS came in at $0.01, representing a decline of 98.4% year-over-year.
For the quarter ended September 30, 2022, UPST’s EPS is expected to be negative, and its revenue is expected to decline 25% year-over-year to $171.27 million. Over the past year, the stock has fallen 94% to close the last trading session at $22.94.
UPST’s weak prospects are reflected in its POWR Ratings. It has an overall rating of D, equating to a Sell in our proprietary rating system.
It has an F grade for Growth, Stability, and Sentiment and a D for Momentum and Quality. It is ranked #85 in the Financial Services (Enterprise) industry. To see the rating of UPST for Value, click here.
Marathon Digital Holdings, Inc. (MARA)
MARA is a digital asset technology company focused primarily on mining cryptocurrencies in the blockchain ecosystem and operates as a digital asset generator in the U.S.
MARA’s revenues declined 15% year-over-year to $24.92 million for the second quarter ended June 30, 2022. Its operating loss widened 61.6% year-over-year to $178.21 million. The company’s net loss widened 76% year-over-year to $191.65 million. Also, its loss per share widened by 60.5% year-over-year to $1.75.
Analysts expect MARA’s loss per share for the current quarter to widen 86.4% year-over-year to $0.41. Its revenue for the quarter that ended September 30, 2022, is expected to decline 45.6% year-over-year to $28.14 million.
It failed to surpass the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has fallen 76.4% to close the last trading session at $10.30.
MARA’s POWR Ratings are consistent with this bleak outlook. It has an overall rating of F, which translates to a Strong Sell in our proprietary rating system. It also has an F grade for Growth, Value, Stability, Sentiment, and Quality. To see more of MARA’s component grades, click here.
SOFI shares were trading at $5.07 per share on Monday afternoon, up $0.26 (+5.41%). Year-to-date, SOFI has declined -67.93%, versus a -21.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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