With inflation remaining elevated, the Fed will likely keep raising interest rates aggressively, and financial stocks usually benefit from a rising interest rate environment. SoFi Technologies, Inc. (SOFI) has jumped sharply over the past few months after it reported strong fourth-quarter results and is currently trading at an expensive valuation. For this and the other reasons explained throughout this article, I think it would be wise to avoid this stock now.
SOFI has been garnering investors’ attention after its fourth-quarter results. The personal finance fintech company’s loss per share came below analyst estimates, and its revenue beat the consensus estimate by 4.1%. The company’s adjusted net revenue in the fourth quarter came in 4.2% above its guidance range high of $425 million, and its adjusted EBITDA came $23 million above the high-end of its guidance.
SOFI’s CEO Anthony Noto said, “Record revenue across all three of our business segments – Lending, Technology Platform, and Financial. Our continued strong growth and significant improvement in GAAP net income margin position us very well in 2023 for another year of significant revenue and EBITDA growth and for reaching GAAP net income profitability in the fourth quarter.”
SOFI officially became a bank in February 2022, and there has been no looking back since then. The company’s total deposits rose 46% sequentially and more than 700% in 2022 to $7.34 billion. Almost 88% of deposits in the fourth quarter were from SoFi Money (including its Checking and Savings and SoFi Money cash management accounts) direct deposits.
The company added 480K members in the fourth quarter. Its total members came in at 5.22 million, rising 51% year-over-year. In the fourth quarter, it added 695K new products, bringing total products to 7.89 million in 2022, increasing 53% year-over-year.
Noto said, “Our strong momentum in member and product adds, and the momentum in products added from cross-buy, reflects the benefits of our broad product suite and Financial Services Productivity Loop (FSPL) strategy.”
For the first quarter of fiscal 2023, the company guided its adjusted net revenue between $430 million to $440 million. In addition, it expects its adjusted EBITDA to come between $40 million to $45 million. The company expects positive GAAP net income in the fourth quarter of fiscal 2023. It expects a 20% incremental GAAP net income margin for the full year.
For fiscal 2023, SOFI expects its adjusted net revenue to be between $1.925 billion and $2 billion. Also, the company expects its adjusted EBITDA to come between $260 million to $280 million.
Although the company is slowly moving away from its student loan refinancing business, uncertainty over student loan forgiveness by the Biden government still remains. The conservative judges led by Chief Justice John Roberts questioned the Biden administration’s plan to forgive student loans worth billions of dollars.
The court also has to decide whether the states and two individuals who are suing the government have the legal right, or standing, to sue. The parties who are suing generally have to prove that they would suffer financial harm from the action.
The Biden administration has said that it's acting in accordance with the Heroes Act. The act allows the Secretary of Education to waive or modify the terms of federal student loans in connection with a national emergency.
SOFI’s stock has gained 35.9% in price over the past three months but declined 42.5% over the past year to close the last trading session at $6.44.
Here’s what could influence SOFI’s performance in the upcoming months:
Mixed Financials
SOFI’s adjusted net revenue increased 58.4% year-over-year to $443.42 million for the fourth quarter ended December 31, 2022. The company’s adjusted EBITDA rose significantly from the prior-year quarter to $70.06 million.
Its net loss narrowed 64% year-over-year to $40 million. In addition, its loss per share narrowed 67% year-over-year to $0.05.
Mixed Analyst Estimates
Analysts expect SOFI’s EPS for fiscal 2023 and 2024 to be negative. Its revenue for fiscal 2023 and 2024 is expected to increase 27.7% and 23.9% year-over-year to $1.97 billion and $2.44 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters.
Stretched Valuation
In terms of forward P/S, SOFI’s 3.06x is 22.5% higher than the 2.50x industry average. Likewise, its 1.18x forward P/B is 3.7% higher than the 1.14x industry average.
Mixed Profitability
SOFI’s trailing-12-month net income margin of negative 21.09% compares to the 27.37% industry average. Its trailing-12-month Return on Total Assets of negative 1.69% compares to the 1.17% industry average.
On the other hand, its 6.83% trailing-12-month Capex/Sales is 305.9% higher than the industry average of 1.68%. In addition, its 79.38% trailing-12-month gross profit margin is 23.9% higher than the industry average of 64.05% industry average.
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 a D grade for Value, in sync with its stretched valuation.
It has an F grade for Stability, consistent with its 1.72 beta.
SOFI is ranked #97 out of 105 stocks in the F-rated Financial Services (Enterprise) industry. Click here to access SOFI’s Growth, Momentum, Sentiment, and Quality ratings.
Bottom Line
After reporting a strong end to fiscal 2022, SOFI expects to report GAAP net income in the fourth quarter and a 20% incremental GAAP net income margin for fiscal 2023. However, SOFI is expected to face increasing competition from other banks. Also, the stock might come under pressure given the uncertainty looming over student loan forgiveness.
So, given its stretched valuation, it could be wise to sell the stock now.
Stocks to Consider Instead of SoFi Technologies, Inc. (SOFI)
The odds of SOFI outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these stocks with A (Strong Buy) or B (Buy) ratings from the Financial Services (Enterprise) industry instead:
Forrester Research, Inc. (FORR)
Everi Holdings Inc. (EVRI)
Heritage Global Inc. (HGBL).
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SOFI shares were trading at $6.33 per share on Thursday morning, down $0.11 (-1.71%). Year-to-date, SOFI has gained 37.31%, versus a 3.01% 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.
1 Financial Stock You Might Want to Sell in March 2023 StockNews.com
