A highly ambitious company, SoFi Technologies (NASDAQ:SOFI) aims to make personal finance a social activity through an all-in-one app. Folks who invest in SOFI stock are effectively wagering on a radically non-traditional paradigm of the future of banking.
Sometimes, however, non-traditional investments don’t go smoothly at first. Ambitious start-ups like SoFi can face months or even years of uncertainty as they find their footing.
To be honest, I heartily recommended SOFI stock not too long ago, but now I’m having second thoughts about it. The bulls definitely have ammo to support their arguments, but there are bearish points that are also worth considering.
At the end of the day, I’m still optimistic about SoFi, but I am slightly cautious towards it as well. Perhaps a small position in the name will bear fruit in the long run. But please don’t back up the truck and buy a ton of the company’s shares.
A Closer Look at SOFI Stock
Social Capital Hedosophia Holdings V, which no longer exists, was a shell company founded by special purpose acquisition company (SPAC) investor Chamath Palihapitiya.
SoFi, which stands for social finance, went public on June 1 after carrying out a reverse merger on May 28 with that shell company.
At that time, Palihapitiya was all over the financial news, and he seemed to have the golden touch. Anticipation ran high, but maybe it was too high.
The SOFI stock price leaped by 12% on its first day of trading on the Nasdaq Exchange. The stock peaked on June 8 near $24, but then it started sharply declining.
SoFi sank below $15 in late July. Even in early September, the bulls still weren’t able to stage a recovery.
Yesterday SOFI stock closed at $15.01, still a long way from its peak of nearly $24. So is the pullback a warning sign or an opportunity to buy the shares on weakness?
Membership Growth Shines
You can obtain different answers to that question, depending on the data that you’re choosing to focus on.
SoFi’s membership growth was not disappointing last quarter.
The company’s total membership jumped 113% year-over-year to 2.6 million, representing the eighth consecutive quarter in which the firm’s membership increased.
Without a doubt, CEO Anthony Noto had those figures in mind when he commented, “The second quarter proved to be another quarter full of milestones for SoFi.”
Noto surely was also alluding to SoFi’s record quarterly net revenues.
Indeed, in Q2, the company’s net revenues doubled YOY, while its adjusted net revenues climbed 74% YOY.
Rosenblatt analyst Sean Horgan may have had those stats in mind when he recently rated SOFI stock a “buy.”
Horgan issued a $30 price target on the name, indicating that he thinks that the shares can rally sharply.
The Problematic Issues
But SoFi’s financial picture isn’t perfect.
Revenues aren’t the same as profits. And last quarter, one “milestone” (to use the CEO’s word) which SoFi didn’t achieve was profitability.
Despite generating around $231 million of net revenues, the company ended up with a net earnings loss of roughly $165.3 million.
Within SoFi’s earnings press release, I didn’t find any references to cost containment or scaling back spending.
SoFi boasted that the company “more than tripled the number of Financial Services products in the past year,” and that’s all fine and good.
Yet cautious investors have to wonder whether the company is innovating and spending its way into a deep financial hole.
The Bottom Line
SoFi is challenging and potentially disrupting the traditional banking system.
That’s probably a good thing. Moreover, the company is generating revenues hand-over-fist.
But the owners of SOFI stock should want to see the company translating those revenues into positive bottom-line earnings.
Until that happens, it’s probably best to take a cautious stance and only hold a moderate position in the shares.
On the date of publication, David Moadel 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.