When I saw the red ink flash on SoFi Technologies (NASDAQ:SOFI) — and to be fair, everything else — I recalled the age-old marketing trick that pump-and-dump-style experts use to assuage their clients’ fears. In this case, anybody who had a clear vested interest in SOFI stock would probably ask: did anything fundamentally change its narrative?
Usually, it’s asked in a leading manner (along with other supportive phrases) to cajole the audience into saying no. But since I have zero motivation to call SOFI stock one way or the other, I have a different answer. In fact, quite the opposite. The omicron variant of the novel coronavirus has really pushed SoFi Technologies into a wall.
Now, I’m hopeful that the recent selloff is but a flash in the pan. Unfortunately, the trend states otherwise. SOFI stock currently represents a Matryoshka doll of pain. The more you unpack the Russian nesting doll, the more volatility you get. Down nearly 8% over a one-day period on Dec. 4. Down 18% over the trailing week and down 35% over the trailing month.
Yes, SOFI stock is up 35% on a year-to-date basis. But I’m not sure if that’s any consolation for folks who bought shares between mid-October through mid-November.
Now, it’s not fair to pin everything on the omicron variant. As the Wall Street Journal and other sources have been reporting, inflation has been soaring. Due to the intensity of rising consumer prices, Federal Reserve Chairman Jerome Powell is under severe pressure to unwind monetary stimulus. His recent talks have opened the door for said unwinding.
That, of course, has plenty of investors rotating out of risk-on assets. But where does this dynamic leave neobanks like SoFi?
Theory Meets Reality for SOFI Stock
Unlike other follow-the-leader asset classes — did I hear someone say cryptocurrencies? — the market is a diverse arena. What’s bad for some categories of stocks may not be so terrible for other segments. Theoretically, if the Federal Reserve raises rates, that wouldn’t be a terrible outcome for SOFI stock.
Indeed, one of the main advantages of neobanks is that they’re incredibly convenient. Since they don’t have the overhead of physical banks, they can pass on savings to their customers. Typically, that translates to higher-yielding savings accounts and other financial products.
Therefore, if benchmark interest rates rise, SOFI stock could become a beneficiary of more profitable services. While other financial institutions will also enjoy this swing in higher borrowing costs, SoFi still has the lack of physical infrastructure working in its favor.
But reality might impose a rude awakening, not just to SOFI stock, but to financial firms in general. According to the Federal Reserve Bank of St. Louis, “We tend to think that banks prefer high interest rates, and certainly their revenues are likely higher when interest rates on loans and other investments are higher. However, banks must fund their investments, and bank funding costs are also generally higher when market rates are high.”
The central bank further adds that “the effect of higher interest rates on banks’ net interest margins—the difference between banks’ interest income and interest expense expressed as a percentage of average earning assets—is ambiguous.”
What’s not ambiguous is that SoFi is not positioned well for a deflationary downturn. Unlike your typical banking firm, SoFi is not consistently profitable. In addition, the company’s negative free cash flow — which the Covid-19 pandemic greatly exacerbated — puts the neobank in a very rough position.
Cryptos Might Not Help
Recently, my InvestorPlace colleague Chris Markoch made the case that SoFi’s gradual integration of crypto-related services could support the bullish case for SOFI stock. Unfortunately, he had the disadvantage of writing his thoughts at least 48 hours before the massive crypto market downturn.
I’d be curious what he thinks about SOFI stock now. From the enviable position of hindsight, it seems the crypto business would be yet another reminder why a deflationary ecosystem wouldn’t benefit the underlying company.
As it trades in the market and based on its financial profile, SoFi is more a technology play than it is a banking investment. The major banks have the profitability and the resources to ride out a risk-off environment. In contrast, SoFi seems like a sugar rush that’s now crashing hard.
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.