3 More Reasons Why Sofi Technologies’ Struggles Will Likely Continue

Editor’s Note: This article was updated on Feb. 15, 2022, to reflect the fact that SoFi Bank will be a subsidiary of SoFi Technologies and only SoFi Bank will not be able to engage in crypto transactions.

I’ve been bearish on Sofi Technologies (NASDAQ:SOFI) for many months. And, like most of my bearish picks in the last year, SOFI stock has indeed struggled. In fact, over the past one year, the name has tumbled a huge 50%.

The Social Finance (SoFi) logo is seen on a smartphone and a pc screen
Source: rafapress / Shutterstock.com

Now, with the company facing three relatively new hurdles and my core bearish thesis on it still very much intact, I think shares of SOFI have much further to fall. Additionally, despite its huge declines, its valuation remains quite high. That’s definitely not helping SOFI stock’s outlook.

All in all, it looks like this is a name to avoid. Here are three recent issues the company is facing right now.

SOFI Stock: Likely to Take a Big Crypto Hit

The first issue with SOFI stock has to do with cryptocurrency. Specifically, crypto trading volume sank “more than 30%” in February versus January, Financial Advisor reported on Feb. 4, citing CryptoCompare.

As I’ve stated in multiple columns since last summer, I expect crypto valuations to tumble as Congress and the Fed withdraw their stimulus. That thesis has partly played out, as many, if not most cryptocurrencies are far below their 52-week highs.

But after the Fed’s asset purchases are completely terminated next month, I predict that the value of cryptos will sink around 50%-80% in the next two to three months, causing the lion’s share of trading in them to cease.

What’s particularly relevant for SOFI stock here, however, is that the company facilitates crypto trades. In fact, in the third quarter, its Invest revenue soared a humungous 197% year-over-year (YOY) to $1.23 million.

Sofi does not appear to report how much revenue it obtains from crypto investments specifically. However, some clues suggest it could be a great deal. For instance, since the company has not existed very long (founded in 2011) and specializes in college loans, its customers probably tend to be young. Those who invest in cryptocurrencies tend to be young as well.

Let’s say that, as a result of crypto’s collapse, Sofi’s total net revenue drops by $1 million. Since the company’s top line in Q3 was $277 million, $1 million may not seem to be a great deal of money. However, crypto trading is probably still a high-margin activity for Sofi because it’s highly automated.

Let’s say that the loss of crypto trading reduces Sofi’s quarterly EBITDA by $800,000. In Q3, its EBITDA (excluding certain items) was $10.26 million. As such, a decline of $800,000 would have represented a drag of nearly 8% on the company’s Q3 adjusted EBITDA. A possible 8% EBITDA decline is a big deal for Wall Street and, consequently, important for SOFI stock.

Loan Demand Looks Poised to Fall

That’s issue number one. But there are more problems when it comes to SOFI stock. One such problem has to do with those aforementioned college loans. Since the pandemic began, college attendance has dropped significantly. On Jan. 13, NPR reported the following:

“More than 1 million fewer students are enrolled in college now than before the pandemic began. According to new data released Thursday, U.S. colleges and universities saw a drop of nearly 500,000 undergraduate students in the fall of 2021, continuing a historic decline that began the previous fall.”

This decline could weigh meaningfully on Sofi’s college loan business. Meanwhile, demand for its other loans — including refinancing, mortgages and personal loans — could be hurt by rising interest rates. As fellow InvestorPlace contributor Josh Enomoto recently explained, in light of the elevated rates, “consumers and entrepreneurs may be unwilling to borrow as much money.”

That may be particularly true for Sofi’s customer base. The company targets millennials, for instance, many of whom are likely to have lower incomes and less savings than older consumers.

Wall Street Is Not Thrilled with Fintech, Unprofitability

Finally for SOFI stock, there’s the issue of Wall Street and its current view of fintechs and unprofitable firms.

For starters, many fintech companies have not done very well at all in the last few months. I noted the following in a recent article on Block (NYSE:SQ):

“Fintech stocks have been hammered over the past six months, with the Global X FinTech ETF (NASDAQ:FINX) falling close to 30%.”

What’s more, Wall Street is not very enamored with companies that are deeply in the red. Sofi Technologies certainly falls into this category. For example, the company’s 2020 operating income came in at -$313.4 million, worse than the -$237.5 million it reported in 2019. More recently, the situation hasn’t improved. In the 12 months that ended in September 2021, its operating income was -$428.7 million.

The Bottom Line on SOFI Stock

All told, adding to the issues that I’ve outlined above, I’m sticking with my core thesis on Sofi. The thesis? That its app is not meaningfully differentiated from the offerings of competitors. Specifically, Zelle — the app that multiple large banks utilize — provides many of the functions of Sofi Money. Meanwhile, many platforms have similar services to Sofi Invest.

On top of this, SOFI stock has an enterprise value-sales ratio of over 18, which is still quite elevated. Given all of these points, I continue to recommend that investors sell shares.

On the date of publication, Larry Ramer did not hold (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 Plug Power, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. 

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