Personal finance company SoFi Technologies, Inc. (SOFI), which is headquartered in San Francisco, went public on June 1, 2021, through an SPAC deal with blank check company Social Hedosophia Corp V. The merged company has a $8.65 billion (including debt) valuation. The stock gained 4.22% in price on its first day of trading. However, the stock has lost 24.6% since then to close Friday’s trading session at $15.19.

SOFI is a major competitor of Robinhood Markets Inc. (HOOD). In fact, Social Hedosophia Founder and CEO Chamath Palihapitiya has criticized HOOD on several occasions and suggested that users delete the Robinhood app and replace it with SOFI. 

However, HOOD has maintained its leading position in the financial and capital markets, with an 18.90 million monthly active user base, as of September 2021.

Here is what could shape SOFI’s performance in the near term:

Business and Operational Risk

SOFI operates in a rapidly evolving industry but has limited experience in operating its Financial Services and Technology Platform segments. Thus, it might be challenging for management to address the business risks and future growth prospects. Also, the company faces several challenges in increasing or maintaining the types and volume of loans offered in an increasingly competitive environment.

SOFI’s success depends on its ability to attract new customers while retaining its existing customer base. Given the intense competition in the industry, the company must keep providing cost-effective services to maintain its customer base, despite negative profit margins.

SOFI is currently pursuing a national bank charter and evaluating the potential acquisition of a national bank, both of which are expected to increase its compliance costs and add significant additional regulation.

Bleak Financials

SOFI’s net interest income fell 4.3% year-over-year to $260.24 million for nine months ended September 30, 2021. Its loss before income taxes widened 163.7% from the same period last year to $372.93 million, while its net loss worsened 163.8% from its year-ago value to $373.22 million. And its loss per share came in at $0.94.

SOFI is yet to break even. In addition, the company needs to scale its operations tremendously to generate adequate operating cash flows. Furthermore, because SOFI plans to reinvest its earnings to improve its technology and product and services portfolio, its return on investment (ROI) is expected to be low.

Unfavorable POWR Ratings

SOFI has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

SOFI has an F  grade for Value and a D for Quality. In terms of forward Price/Sales, SOFI is currently trading at 12.21x, which is 263.9% higher than the 3.36x industry average, justifying the Value grade. The company’s negative trailing-12-month net profit margin is in sync with the Quality grade.

Of the 132 stocks in the D-rated Financial Services (Enterprise) industry, SOFI is ranked #127.

In total, we rate SOFI on eight distinct levels. View SOFI ratings for Growth, Stability, Sentiment, and Momentum here.

Bottom Line

While SOFI has been aggressively attempting to increase its market share, it is still a relatively new player in the financial services industry. Furthermore, the company’s current expansion plans imply that it will be subjected to many new regulations, increasing compliance costs significantly. Thus, we think SOFI is best avoided now.

How SoFi Technologies, Inc. (SOFI) Stack Up Against its Peers?

While SOFI has a D rating in our proprietary rating system, one  might want to consider taking a look at its industry peers, Forrester Research, Inc. (FORR), Donnelley Financial Solutions, Inc. (DFIN), and Everi Holdings Inc. (EVRI), which have an A (Strong Buy) rating.

Note that DFIN and EVRI are both among the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

SOFI shares were trading at $15.47 per share on Monday afternoon, up $0.28 (+1.84%). Year-to-date, SOFI has gained 24.36%, versus a 23.53% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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