Hold Off on SoFi Stock After a Post-Earnings Spike
Like other fintech stocks, shares of SoFi Technologies (NASDAQ:SOFI) stock have had a tough year. Blame it on the market’s changing view of high-growth stocks, plus the expectation that economic conditions will become more challenging. Trading above $15 per share at the start of January, SOFI stock at one point fell into penny-stock territory (under $5 per share).
Earlier this month, this former high-flier got some of its mojo back. As InvestorPlace’s Eddie Pan reported on Aug. 3, shares spiked following the release of the company’s most recent earnings report. The spike pushed the stock back into the high single digits.
But before you think this is a sign that a comeback is in motion, think again. It’s clear that investors went overboard with their reaction to SoFi’s latest results. If a key negative comes back into focus, a slide back toward its 52-week low may lie ahead.
SOFI Stock and Its Recent Earnings Report
After the market closed on Aug. 2, SoFi released its second-quarter results. For the quarter ended June 30, revenue went up 50% year-over-year. Its net losses also came in lower than expected. Management also raised its outlook for the full year.
As mentioned, the market had an exuberant reaction to these results. On Aug. 3 alone, SOFI stock soared around 28.4%. However, this surge is shaping up to be a brief one. At the time of writing, shares have started to slide back from that peak.
In large part, the slide is due to a recent negative development. Softbank (OTCMKTS:SFTBY), a large shareholder, announced plans to sell some or all of its 9% stake in the student-loan-focused fintech company. Yet, beyond this factor, investors may be taking a second look at SoFi’s results.
As I see it, the results and the guidance update weren’t exactly stunning. Even worse, while SoFi continues to grow its top line, the company has made little progress in getting toward profitability. All of this points to little change to the underlying “story,” making the stock’s recent pop illogical. This pop could fully reverse if the market comes to a similar conclusion.
A Key Negative Could Come Off the Backburner
The headlines may have touted SoFi’s “beat and raise,” but a closer look suggests this may be an overstatement. Revenue last quarter ($356 million) was well ahead of management’s lowball guidance ($330 million-$340 million), yet analysts were already expecting revenue above this range.
As for its guidance raise, management only slightly upped its full-year revenue estimate. Instead of guiding for a range between $1.505 billion and $1.51 billion, management now expects 2022’s top line to come in at $1.508 billion to $1.513 billion. That’s an increase of just 0.2%. That’s hardly cause for exuberance.
Again, if the market comes to a similar conclusion, we could see SOFI stock give back more of its recent rally, atop the drop fueled by the SoftBank news. If that’s not bad enough, a key negative with this stock could come back into focus: its profitability problem.
While management keeps using figures like adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), on a GAAP basis, SoFi operates in the red. This is expected to continue through at least 2023. If it makes little progress in the quarters ahead to narrow losses, the San Francisco-based company could struggle to avoid further price declines.
The Verdict on SOFI Stock
SoFi continues to trade at a premium to its fintech peers. Established rivals like Block (NYSE:SQ) and PayPal (NASDAQ:PYPL) trade at much lower (in the 2.6x to 4x range) price-to-sales (P/S) multiples than this company. SOFI stock trades for around 5.1x trailing 12-month sales.
Yes, SoFi’s higher rate of revenue growth somewhat justifies this. However, it’s questionable when this company will get to consistent profitability, not to mention whether it will eventually generate earnings high enough to warrant a higher stock price. To do so, it needs to beat current long-term forecasts, which call for earnings of 28 cents per share in 2025.
With SoFi shares once again sliding, a renewed focus on its profitability issues could drag it even lower. Therefore, the best move for now is to avoid SOFI stock.
SOFI stock earns a D rating in my Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
