The Federal Reserve is expected to continue increasing interest rates aggressively due to high inflation and a strong jobs market. While financial stocks tend to benefit from a rising interest rate environment, the recent collapse of two major banks has caused a lot of stress in the sector.
Financial stock SoFi Technologies, Inc. (SOFI) has slumped 17.5% over the past month. Given the macroeconomic uncertainties and the company’s weak fundamentals, I think it is best to avoid the stock. In this piece, I’ve discussed why I am extremely bearish on the stock.
Two major banks that served growth sectors, such as tech and cryptocurrency, collapsed last week, causing a concerning situation for the financial sector.
Digital financial service company SOFI reported solid results for the fiscal fourth quarter of 2022. Its financial services segment saw an increase in net revenue for the quarter and the full year of 2022. However, the contribution loss for the segment also increased in both periods.
Additionally, while SOFI’s personal loan originations in the fourth quarter grew 50% year-over-year to $2.47 billion, the company experienced a decline of 72% in student loan originations and an 84% decline in home loan originations compared to the year-ago period.
Moreover, SoFi had filed a federal lawsuit asking the Biden administration to end the pause on federal student loan payments, claiming that the moratorium has no legal basis and has caused the company to lose millions of dollars in profits.
But the Education Department defended the legality of the pause, and borrower advocates criticized the lawsuit as money grabs at the expense of those struggling with student debt.
SOFI anticipates its adjusted net revenue to come between $1.93 billion and $2 billion for the fiscal year 2023. Additionally, the company projects its adjusted EBITDA to range from $260 million to $280 million.
SOFI’s shares declined 17.5% over the past month and 9.8% over the past six months to close the last trading session at $5.46. Moreover, the stock is trading below its 50-day and 200-day moving averages of $6.20 and $5.82, respectively, indicating a downtrend.
Here’s what could influence SOFI’s performance in the upcoming months:
Recent Quarter Results
SOFI’s adjusted net revenue increased 58.4% year-over-year to $443.42 million for the fourth quarter that ended December 31, 2022. Its total interest expense rose 442.8% year-over-year to $98.82 million, while its contribution loss from the financial services segment grew 23.9% year-over-year to $43.59 million.
In addition, its net loss and net loss per share amounted to $40 million and $0.05, respectively.
Poor Profitability
SOFI’s trailing-12-month net income margin of negative 21.09% compares to the 27.19% industry average. Its trailing-12-month ROTA of negative 1.69% compares to the 1.15% industry average.
Additionally, its 0.11x trailing-12-month asset turnover ratio is 42.9% higher than the industry average of 0.19x. Its trailing-12-month ROCE of negative 7.53% compares to the industry average of 11.19%.
POWR Ratings Reflect Bleak Prospects
SOFI has an overall D rating, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. SOFI has an F grade for Stability, in sync with its 24-month beta of 1.54.
It also has an F grade for Quality, justified by poor profit margins.
Moreover, its D-grade in Momentum is consistent with a 38.7% decline in price over the past year.
SOFI is ranked #91 out of 101 stocks in the F-rated Financial Services (Enterprise) industry.
Beyond what I have stated above, we have also given SOFI grades for Growth, Value, and Sentiment. Get all SOFI ratings here.
Bottom Line
In the fourth quarter, SOFI’s strong demand for personal loans was more than offset by lower student loan and home loan originations. Due to macroeconomic challenges and the ongoing transition of home loan fulfillment partners, SOFI’s lending segment total origination volume decreased by 21% year-over-year.
Moreover, given the lingering uncertainty over the financial sector, it could be wise to avoid the stock now.
How Does SoFi Technologies, Inc. (SOFI) Stack up Against Its Peers?
SOFI has an overall POWR Rating of D. One could also check out these other stocks within the Financial Services (Enterprise) industry: Forrester Research, Inc. (FORR) with an A (Strong Buy) rating and CPI Card Group Inc. (PMTS) and Everi Holdings Inc. (EVRI) with a B (Buy) rating.
Consider This Before Placing Your Next Trade…
We are still in the midst of a bear market.
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SOFI shares rose $0.03 (+0.55%) in premarket trading Monday. Year-to-date, SOFI has gained 19.09%, versus a 2.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
Is It Too Late to Get in on SOFI Stock? StockNews.com
