Is the crash of SoFi Technologies’ (NASDAQ:SOFI) stock over the last four weeks due to the broader decline in financial technology companies or a sign of bigger issues at the online lender?
Since mid-November, SOFI stock has come down 36% to $14.48 per share. It’s been a swift decline that has mirrored similar drops in other financial technology (fintech) stocks ranging from PayPal (NASDAQ:PYPL) and Block (NYSE:SQ).
Mainstream credit card and online payment companies such as Mastercard (NYSE:MA) and Visa (NYSE:V) have also struggled in this year’s second half. However, the declines of SoFi’s share price over the past month have been particularly steep, raising the question of whether the company and its stock are facing bigger issues that are pulling them down.
The precipitous slide of SOFI stock began shortly after the company delivered a strong third-quarter earnings report. However, SoFi announced, along with its Q3 results, a secondary stock offering. Meanwhile, one of the company’s prominent shareholders decided to sell its shares in the company.
The share sales prompted a rush to the exits by other stockholders. And, judging by the company’s financials, the selloff of SOFI stock looks to have been overdone. For Q3, SoFi reported a net loss of 5 cents per share on revenue of $272 million. Both top and bottom line numbers beat the average forecasts of Wall Street analysts.
SoFi also raised its full year top-line guidance, saying it now expects to generate more than $1 billion of revenue. Yet the positive earnings and guidance were overshadowed by news that the company was undertaking a secondary stock offering of 50 million shares on Nov. 15.
These weren’t shares issued by SoFi, but rather a big sale by major shareholders such as SoftBank Group (TYO:9984), Silver Lake Partners, Qatar Investment Authority, and Red Crow Capital. The 50 million shares represented more than 6% of the company’s total stock. Such a big share sale naturally created negative sentiment towards SOFI stock.
Making matters worse, venture capital firm Social Capital, which took SoFi Technologies public via a special purpose acquisition company (SPAC), announced on Nov. 18 that it would be selling 15% of its stake in SOFI stock so that it could invest capital in other opportunities (including other fintech companies).
This news served as a double whammy that dragged SoFi’s share price down even further.
Reasons for Optimism
Despite the big drop of SOFI stock over the past month, there is reason to remain optimistic about SOFI stock and its long-term prospects. The company, which provides banking products ranging from mortgages to student loans via a mobile app, has submitted an application with the Federal Reserve to become a bank holding company.
And the company has said that it is continuing to search for a regional bank to acquire. Both these developments are positive. A national bank charter would give SoFi the ability to increase its sales and cut its expenses. It would also enable the company to expand its lending operations and lessen its reliance on its banking and asset management partners.
Also important to remember is that Social Capital continues to retain 85% of its investment in SoFi. Rather than an indication of a problem with SoFi, the recent share sales appear to be a case of big investors taking gains while the stock was trading at high valuations.
The good news is that SOFI stock is cheap after its recent decline. The company’s trailing price-sales ratio is now 14, which is low compared to other fintech companies. And the company’s sales jumped 35% year-over-year in the third quarter. As a result, investors looking for a high-growth stock at a reasonable price can now look to SoFi.
The Bottom Line on SOFI Stock
The sharp selloff of SoFi’s shares has been a result of negative sentiment and poor perceptions. Big institutional investors reducing their stake in a company is never viewed positively on Wall Street. However, SoFi only went public in June of this year,. It is common for investors to take profits within the first six months of a company going public and once the lockup period surrounding an initial public offering (IPO) expires.
Fundamentally, SoFi Technologies remains a strong company that has a lot working in its favor. As a result investors shouldn’t be spooked by the recent share sales. Plus, the median price target analysts have on the stock is $26, suggesting a potential 77% gain from its current levels.
Over the long-term, the company’s shares are still worth owning, so SOFI stock is a buy.
On the date of publication, Joel Baglole held long positions in SQ and V. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.