I like and admire a number of traits behind SoFi (NASDAQ:SOFI) stock, including its rapid growth and its apparent ability to obtain tens of thousands of millennial customers.
Nonetheless, I don’t believe that the extremely high valuation of SOFI stock is justified by the company’s financial results and its current outlook.
For the most part, SoFi appears to be offering conventional financial services that are not disruptive in any way.
Moreover, although it’s been in business for a decade, the company’s bottom line is still negative, and its margins are discouragingly low.
Although I believe that SoFi can become profitable within the next two or three years, I don’t expect the company’s future financial results will be as strong as its current stock price suggests.
And finally, the company could be badly hurt by any future, protracted economic downturn.
Rapid, Impressive Growth and SoFi Stock
In the first quarter of 2021, SoFi’s top line soared 151% year-over-year to $216 million. Meanwhile, last quarter, the company’s membership base jumped 23% versus the end of the previous quarter, reaching 430,000.
According to Seeking Alpha columnist Tyler Okland, SoFi’s customer base is primarily millennials who are tech-savvy and likely to have high future earnings power. He argued that this demographic has gravitated to SoFi because of its easy-to-use app.
I believe that the many student loans that SoFi has financed (according to Okland, as of Q4 of 2020, student loans still accounted for over 50% of SoFi’s lending originations) have facilitated its ability to contact millions of millenials with offers for other loans.
SoFi Doesn’t Seem Disruptive and Isn’t Very Profitable
My research indicates that SoFi’s main business consists of ordinary financial services, such as loans, credit cards, and investing services.
Its Galileo unit, acquired last year, is more unique, but it basically appears to be a financial technology outsourcing company i.e. it provides technology to financial institutions.
I don’t see any evidence that SoFi has a disruptive business model like that of Lemonade (NYSE:LMND), which is using AI to sell insurance and handle claims and assures its policyholders that it donates portions of their premiums to good causes.
Founded in 2011, SoFi remains unprofitable. For Q1, it reported a net loss of more than $177 million. In the previous quarter, its net loss came in at $82.6 million.
It’s true that the firm’s EBITDA, excluding certain items, was positive $4.1 million in Q1 and $11.32 million during the previous quarter. In Q1, however, its adjusted EBITDA margin was just 2%.
With its market capitalization of $17.33 billion and its 2021 revenue guidance of $980 million, SOFI stock has a forward price-sales valuation of over 17.5. That’s a gargantuan valuation for a non-disruptive, unprofitable company whose primary business is financial services.
Very Vulnerable to a Recession
I believe that SoFi’s large portfolio of student loans could make it especially vulnerable to a recession. Last year’s recession was unique because it was exceptionally brief and hurt mainly low-income workers.
In a more conventional economic downturn that lasts much longer, hits white-collar Americans hard, and is not combated with as much government assistance, SoFi’s student loan portfolio could very well suffer huge losses.
That will be particularly true if Congressional Democrats, giving into the calls of some 0f their core constituencies, change the law to make it easy to discharge student loans in bankruptcies.
The Bottom Line on SoFi Stock
Due to SoFi’s lack of true disruption and profitability, along with its excessive valuation and its vulnerability to a protracted economic downturn, I view SOFI stock as a sell at this point.
On the date of publication, Larry Ramer 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.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.