The much-talked-about financial services and digital bank SoFi Technologies, Inc. (SOFI - Get Rating) reported a better-than-expected bottom line for the third quarter of fiscal 2022. The company’s loss per share of $0.09 came in narrower than the consensus estimate of $0.10, representing a positive surprise of 10%.

SOFI operates through three segments: Lending, Technology Platform, and Financial Services. It runs Galileo, a technology platform that offers services to financial and non-financial institutions, and Apex, a technology-enabled platform that provides investment custody and clearing brokerage services.

The company added 424K new members in the third quarter, leading the total member count to 4.7 million, up 61% year-over-year. In addition, the company added 635,000 new products, ending with nearly 7.20 million total products, up 69% year-over-year.

SOFI revised its adjusted EBITDA forecast for fiscal 2022 to $115 million to $120 million, up from the previously expected $104 million to $109 million.

However, the business continues to be plagued by the student loan forgiveness program. The program intends to cancel up to $10,000 (to non-Pell Grant recipients) and $20,000 (Federal Pell Grant recipients) in student loan debt for qualifying borrowers.

After getting its bank charter earlier this year through the acquisition of Golden Pacific Bancorp, SOFI has been able to lower its cost of capital. In addition, its direct deposits increased 86% sequentially to $5 billion in the third quarter.

Although SOFI performed well in the third quarter, it is expected to face several headwinds. SOFI’s personal loan originations saw strong growth, but recession fears may affect personal loan demand. Housing and student loan origination witnessed a big drop in the third quarter and are not expected to recover soon amid the rising borrowing rates.

Despite the buzz around the stock, investors have been worried about the company’s weak financials. Shares of SOFI have declined 67.2% year-to-date and 77% over the past year to close the last trading session at $5.18.

Here’s what could influence SOFI’s performance in the upcoming months:

Weak Financials

SOFI’s non-interest expense increased 65.1% year-over-year to $498.43 million for the third quarter that ended September 30, 2022. The company’s net loss widened 147% year-over-year to $74.21 million. Its loss per share widened 80% year-over-year to $0.09. Its total liabilities stood at $10.33 billion at the end of the third quarter, compared to $4.48 billion as of December 31, 2021.

Mixed Analyst Estimates

Analysts expect SOFI’s EPS for fiscal 2022 and 2023 to remain negative. Its revenue for fiscal 2022 and 2023 is expected to increase 49.6% and 35.6% year-over-year to $1.51 billion and $2.05 billion, respectively.

Weak Profitability

SOFI’s trailing-12-month ROCE is negative compared to the 11.72% industry average. Likewise, its trailing-12-month net income margin is negative compared to the 27.86% industry average. Also, its trailing-12-month asset turnover ratio is 0.11% compared to the 0.20% industry average.

POWR Ratings Reflect Bleak Prospects

SOFI has an overall F rating, equating to a Strong 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 an F grade for Quality, in sync with its weak profitability.

It has a C grade for Sentiment, consistent with mixed analyst estimates.

SOFI has ranked #102 out of 105 stocks in the F-rated Financial Services (Enterprise) industry. Click here to access SOFI’s ratings for Growth, Value, Momentum, and Stability.

Bottom Line

SOFI is trading below its 50-day and 200-day moving averages of $5.49 and $7.39, indicating a downtrend. Although the company’s third-quarter loss came in narrower than expected, it significantly widened year-over-year.

Despite its strong growth in personal loan originations last quarter, personal loan demand may wane due to inflationary or recessionary pressures. Student and home loans, which have significantly declined, are also not expected to recover anytime soon.

So, given the company’s disappointing financials and weak profitability, it could be wise to avoid the stock.

How Does SoFi Technologies, Inc. (SOFI) Stack up Against Its Peers?

SOFI has an overall POWR Rating of F, equating to a Strong Sell rating. Therefore, one might want to consider investing in other Financial Services (Enterprise) stocks with an A (Strong Buy) or B (Buy) rating, such as Forrester Research, Inc. (FORR - Get Rating), Everi Holdings Inc. (EVRI - Get Rating), and Consumer Portfolio Services, Inc. (CPSS - Get Rating).

SOFI shares were trading at $5.08 per share on Tuesday afternoon, down $0.10 (-1.93%). Year-to-date, SOFI has declined -67.87%, versus a -18.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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