Back when SoFi Technologies (NASDAQ:SOFI) was still a reverse-merger target with a funky name, enthusiasm was sky-high for the special purpose acquisition company (SPAC) poised to become the equity unit for the fintech firm. For one thing, the investing public couldn’t get enough of SPACs, which catapulted SOFI stock to blistering heights.
At its closing peak, shares would cost you about $26 a piece. Largely, retail buyers jumped aboard the cult following of Chamath Palihapitiya, an early Facebook (NASDAQ:FB) executive turned venture capitalist. He sponsored several SPACs which initially performed very well, further begetting bullishness on all that he touched. Given that speculation based on stock trading on margin continued to hit fresh highs one after the other, the bullishness in SOFI stock was no surprise.
But to be fair, it wasn’t just the SPAC element that intrigued investors. Rather, SoFi Technologies helps democratize access to capital by removing several consumer friction points. In early May, I wrote the following:
Specifically, SoFi features elements that are very similar to neobanks, which are physical branchless institutions that provide bank-like services. Because they don’t have the overhead associated with the big banks, they can pass down the savings to their members in the form of higher-yielding savings accounts and other compelling rewards.
SoFi taps into this demand dynamic. Further, its investment platform allows members to invest in stocks, exchange-traded funds (ETFs) and even cryptocurrencies. Therefore, SoFi is financial services geared toward the millennial mindset. Since this demographic is the largest in the U.S. workforce, you can’t go wrong catering to this consumer base.
Still, it couldn’t be avoided that speculation was the core driver behind SOFI stock. This is fine during a bullish phase. But in a panicked environment, this can lead to a flood of red ink. When SPAC fever lost its appeal — particularly those that Palihapitiya sponsored — SoFi Technologies fell in sympathy.
Beware the SOFI Stock Rebound Argument
Lately, though, it seems SPACs are regaining their mojo. Not only is SOFI stock a beneficiary, so is its sponsor Palihapitiya’s Social Capital Hedosophia Holdings. According to a Forbes article, the frenetic trading which social media forums sparked helped lift the so-called SPAC king back to billionaire status.
Given how much SOFI stock initially gained when it was the equity unit of a blank-check firm, you might be tempted to jump on this bandwagon. And while I can comfortably say that Palihapitiya doesn’t give a rat’s hind end about my opinion, if I were in the position, I would recommend him securing his regained billionaire status with cold, hard cash.
According to a report from American Banker, credit unions are grappling with how to spark growth in fee income:
Third-quarter  data from the National Credit Union Administration, the most recent information available, showed a 9.5% year-over-year increase in noninterest income, compared with 5.5% growth in the year ending Sept. 30, 2019. However, that figure — which includes gains from investments in credit union service organizations and other income sources — masks a substantial decline in fee income, which was down by about 12%. That drop reflects the fact that not all credit unions participated in the Paycheck Protection Program or benefitted from the mortgage refinancing boom, both of which generated fee income. Many consumers also had less need for overdraft protections thanks to stimulus checks and expanded unemployment benefits.
True, SoFi Technologies reported a nearly 6% increase in loan origination and sales for the first quarter of 2021 compared to the year-ago quarter. But as American Banker reported, several financial institutions benefitted from a mortgage refinancing boom and the Paycheck Protection Program. These are two elements that are likely non-recurring.
Therefore, once circumstances normalize, it’s a question mark whether SOFI stock can grow into its expectations.
Too Many Risks
Over several InvestorPlace articles, I have expressed my thoughts that deflation, not inflation, represents the biggest threat to our fragile economic recovery. A significant reason why I believe this comes down to the math: U.S. GDP has already recovered to $22 trillion, yet the worker base (employment level) is still more than 4% below pre-pandemic level.
Essentially, you have increased output over a lower contribution base. That’s deflationary because it means fewer people have jobs, limiting the economy’s capacity for growth.
If this line of thinking is correct, then SOFI stock faces serious problems. As I mentioned earlier, several financial institutions are struggling to spark non-interest income. Likely, they’ll continue to struggle should deflation hit the economy.
Also, a deflationary environment translates to fewer people wanting to take out loans. In this case, double-digit personal saving rates don’t help. It indicates that even in a supposedly inflationary ecosystem, most American consumers are saving their money, not spending it.
With so many questions over the fundamentals that deeply affect SOFI stock, I’m going to sit this rally out.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.