As one of the most popular financial technology (fintech) enterprises, SoFi Technologies (SOFI) naturally commands attention. Therefore, when shares stumbled Monday, options traders appeared to have zeroed in on the contrarian opportunity. In the trailing month, SOFI stock gave up 20% of equity value, seemingly presenting good value for the bulls.
However, prospective traders should be careful about jumping aboard the fintech giant. While circumstances initially appeared auspicious earlier this year, SOFI stock hasn’t looked that great over the past 365 days, losing 31% of value. Moreover, the company could face a longer-term headwind that levers the possibility of a sharp correction.
SOFI Stock Stuck in a Tug-of-War
As stated earlier, SOFI stock got off to a brilliant start early this year. Following a natural cool-down period, SoFi shares understandably declined amid the beginning of the banking crisis in March. Unfortunately, on Monday, SOFI suffered a company-specific attack.
As the Motley Fool (TMF) pointed out, analysts at Wedbush issued a scathing research report, along with imposing a downgrade, sending shares tumbling down. Specifically, Wedbush cut its rating on SOFI stock to “underperform” from “neutral.” As well, it lowered its price target to $2.50, implying almost a half-off haircut from the closing price of $4.77.
Per TMF, Wedbush’s main point of concern centers on SoFi’s accounting treatment of its loans and capital positions. Following the outbreak of the COVID-19 pandemic, the fintech firm pivoted heavily toward personal loans, in large part because of the student loan moratorium.
“Its approach has been to designate the loans as held-for-sale, holding the loans on its balance sheet for six to nine months and collecting monthly interest payments, and then selling the loans to investors. This approach also enables SoFi to avoid setting aside capital for loan losses, which would cut into its earnings,” stated TMF.
However, SoFi did not mark down the fair value of its loans held for sale. As TMF points out, there should still be some losses despite SoFi lending to higher-quality borrowers, especially on unsecured personal debt. Thus, Wedbush believes that capital levels might be overstated.
Still, this matter doesn’t seem to bother options traders. Following the close of the May 15 session, total volume reached 347,807 contracts against an open interest reading of 1,641,836. Further, the delta between the Monday session volume and the trailing one-month average metric came out to 106.97%.
Drilling down, call volume hit 220,450 contracts versus put volume of 127,357. This pairing yielded a put/call volume ratio of 0.58, on paper favoring the bulls. Still, investors may want to be careful about diving headfirst into the fintech player.
SoFi Faces a Significant Obstacle on the Horizon
According to SoFi’s presentation for the first quarter of 2023, in Q1 of 2021, personal loan originations amounted to $805.7 million. This tally represented 31.6% of total loan originations. However, fast forward one year later and personal loans jumped to slightly over $2 billion. At the time, personal loans accounted for just under 61% of total originations.
As of Q1 of this year, personal loans accounted for nearly 83% of total originations, a tally just under what the company printed in Q4 2022. Either way, the trend is obvious. As SoFi trudges through the unique circumstances of the post-pandemic new normal, the company relies heavily on personal loans.
To be fair, last year, Mizuho analyst Dan Dolev pointed out that during difficult economic times, high-FICO borrowers have “historically proved stable.” Because SoFi boasts an average 746 FICO score for personal loans, SOFI stock should be resilient against incoming broader pressures.
However, one of the main concerns about personal loans – aside from them being unsecured – is that they generally represent a consumptive framework rather than an accretive one. For instance, common reasons for taking out a personal loan include debt consolidation, paying for medical bills and emergencies and home improvement projects.
In other words, the benefit for the underlying transactions that spark personal loans in many cases have already been actualized. In contrast, with home mortgages, people are building equity in the home. As well, there’s always a chance that the home itself can rise in value. It’s also the same principle with student loans in that graduates leverage their education to earn (hopefully) ever-rising income.
However, with many if not most cases involving personal loans, collateral really doesn’t exist. And if it does, it’s of very limited market value. Therefore, the risk to the lender is high, especially under challenging economic conditions.
A Risky Proposition
According to the Barchart Technical Opinion indicator, SOFI stock rates as a 72% sell. Notably, for the short term, Barchart warns that SOFI pings as a 100% sell. For medium to long-term indicators, it’s a 50% sell. These stats don’t exactly deliver much confidence to prospective investors.
On the flipside, Wall Street analysts overall remain optimistic about SOFI stock, assessing it a moderate buy. Individually, this consensus view breaks down as six strong buys and five holds. Three months ago, seven analysts held a strong buy rating on SOFI while only four viewed it as a hold. Thus, we’re seeing a slight pickup in pensive sentiment.
On balance, with potentially troubling headwinds impacting the economy – including stubbornly high inflation and banking sector woes – the safer approach may be to watch SOFI stock from a distance.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
