San Francisco-based digital financial services company SoFi Technologies, Inc.’s (SOFI) shares climbed more than 12% in price after the company made its stock market debut on June 1, 2021, which was facilitated by a merger with a special purpose acquisition company named Social Capital Hedosophia Corp V. The stock also advanced after the company reported its third-quarter earnings on November 10. Its total net revenue increased 35.5% year-over-year to $272 million in the quarter, while its net loss came in at $30.05 million compared to $42.88 million in the year-ago period. Since its public debut, the stock has lost 4.3% in price to close yesterday’s trading session at $21.67. 

SOFI faces intense competition from other players in the finance space, such as Ally Financial Inc. (ALLY) and Synchrony Financial (SYF). In March, SOFI announced its plans to acquire Golden Pacific Bancorp and the bank charter that comes with it. That would allow the bank to gather cheap deposits and originate loans without involving a third-party bank. This could function as a catalyst for its growth.

However, according to a Business Journals report, a Golden Pacific Bancorp director has filed suit over the Sofi acquisition. If the court finds the shares of Golden Pacific Bancorp were not lawfully obtained, the plaintiff could block the acquisition altogether. So, the stock’s near-term prospects look bleak.

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

Extension of Student Loan Relief May Not Be Favorable

Former U.S. President Donald Trump announced a pause on student loan repayment in March 2020. Subsequently, SOFI’s largest and oldest business, student loans, has been running at about 50% of the pre-COVID-pandemic volume for the last 20 months. Over the last 10 months, the Biden administration has announced billions of dollars in student loan cancellations. In August 2021, the U.S. Department of Education announced an extension of the pause on student loan repayment, interest, and collections until January 31, 2022. Furthermore, in October 2021, Education Secretary Miguel Cardona said that the Biden Administration is still examining broad-based loan forgiveness, which could further impact SOFI’s business.

Weak Profitability

In terms of trailing-12-month net income margin, SOFI’s negative 58.62% is lower than the 30.22% industry average. The stock’s trailing-12-month 0.07% asset turnover ratio is 65.8% lower than the 0.21% industry average. Also, its trailing-12-month ROTA and cash from operations are negative compared to the 1.35% and $139.46 million respective industry averages.

Stretched Valuation

In terms of forward P/S, SOFI’s 18.43x is 422.2% higher than the 3.53x industry average. And the stock’s 4.62x forward P/B is 259.5% higher than the 1.29x industry average. Furthermore, its 509.33x forward P/CF is significantly higher than the 10.89x industry average.

POWR Ratings Reflect Bleak Outlook

SOFI has an overall D rating, which equates 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 Stability, which is consistent with its 1.52 beta.

The stock has a D grade for Growth, in sync with analysts’ expectation that its EPS will remain negative in fiscal 2021 and 2022.

SOFI has a D grade for Quality, which is consistent with its lower-than-industry profitability ratios and an F grade for Value, in sync with its higher-than-industry valuation ratios.

We have also rated the stock for Momentum and Sentiment in addition to the POWR Rating grades I have just highlighted. Click here to see all the SOFI ratings.

SOFI is ranked #139 out of 143 stocks in the Financial Services (Enterprise) industry.

Bottom Line

Even though SOFI’s revenues increased in the last reported quarter, the company reported a loss. Its EPS is expected to remain negative in the coming quarters. Moreover, the company’s primary business, the student loan business, could continue to be impacted in the near term. So, we think it could be wise to avoid the stock now.

How Does SoFi Technologies (SOFI) Stack Up Against its Peers?

While SOFI has an overall POWR Rating of D, one might want to consider taking a look at its A-rated (Strong Buy) industry peers: Forrester Research, Inc. (FORR), Donnelley Financial Solutions, Inc. (DFIN), and Santander Consumer USA Holdings Inc. (SC).

SOFI shares rose $0.16 (+0.74%) in premarket trading Wednesday. Year-to-date, SOFI has gained 74.20%, versus a 26.74% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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