SoFi Is a Fundamentally Weak Ticking Time Bomb

A deep dive into SoFi Technologies (NASDAQ:SOFI) stock provides reason enough not to get on board. Those fundamentals will provide the backbone of my argument against investing in SoFi. 

I would argue that potential investors avoid the buzz and buzzwords around the SPAC gone public financial services company. Specifically, I’d urge investors, especially the young ones the company targets with its one-stop financial services app, to avoid SOFI stock. 

Never mind that the company was taken public by so-called SPAC king Chamath Palihapitiya. SPACs were hot and then they weren’t. His fate follows that of his multiple SPAC public offerings. They go up, he’s great. They fall, he’s not. 

It’s irrelevant, frankly: SoFi’s future will be much more a reflection of its fundamentals. Forget that it’s a SPAC, and forget that it supposedly caters to the millennial mindset and one-stop financial apps. 

None of that matters due to its poor fundamentals. 

Fundamentally Flawed

I’d suggest that potential and current investors look first at SoFi’s most recent earnings presentation in forming an opinion about its investment worthiness. Investors can find a great deal of information beginning on page 16 with its non-GAAP reconciliations. Focusing on the broader picture, SoFi’s continued losses paint a fairly accurate picture. 

The company has hardly made any progress toward posting a gain in the past three years. Its net loss in 2018 hit $252.39 million. Two years later, at the end of 2020 it would post a loss of $224.053 million. 

The basic math dictates that SoFi shrank its loss by $28.337 million. That means its loss became 11.23% smaller. But at the end of the day the company lost $224.053 million throughout 2020. That is fundamentally poor. 

I mentioned that the company was successful in shrinking its loss by 11.23% between 2018 and 2020. It deserves credit where credit is due. Even if it missed by $224.053 million, it did move closer to posting net income. 

However, investors have to take context into consideration in this case. The context here is that SoFi’s revenues increased massively during that time while it could only close the loss gap by 11.23%. 

Revenues increased from $240.721 million in 2018, to $621.207 million in 2020. That means the company’s revenues multiplied by 158% yet it could only improve its loss by 11.23%. 

The company is attempting to take GAAP-compliant net income figures and then overlay non-GAAP figures to talk back its poor performance. This is little more than accounting tricks that it utilizes to arrive at an EBITDA figure to mitigate the truth. That truth again is that it lost a lot of money in each of the last 3 years. 

Adjusted EBITDA figures will lead you to believe that it only lost $44.576 million in 2020. Those same figures are even used to lead investors to believe that it was profitable in Q1 based on its $4.132 million EBITDA. Sounds intriguing, but look at its GAAP net income figure and you’ll see that SoFi really lost $177.546 million. 

Caters to a ‘Problematic’ Demographic

The company’s biggest business segment is its lending segment. The vast majority of the company’s income is derived from loan origination. It originates home, student, and personal loans and receives money servicing said loans. 

Student loans accounted for about 40% of all originations in Q1 of 2021. It is clear that the company is attempting to carry less and less student loans on its balance sheets as it moves toward a higher percentage of home and personal loans. 

But it is what it is: SoFi will have about 45% to 50% student loans buoying its business in 2021. If you believe that there could be a wave of student loan defaults about to hit the U.S., then SOFI would be a stock to avoid. 

From where I’m sitting, SoFi looks to be more hope than anything else.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.