When SoFi Technologies (NASDAQ:SOFI), a one-stop-shop for all things fintech, posted quarterly results, shares rallied briefly. SOFI stock buying ended abruptly at the 50-day simple moving average. The stock continued its downtrend for nearly the rest of March.
SoFi has multiple headwinds ahead. Despite posting a strong fourth quarter and promising strong fiscal year 2022 results, competition is rising. The company is counting on product sales per customer. Are SoFi’s strong product sales to active customers enough? After markets flocked to traditional banks and credit card stocks, investors need to demand more.
SoFi is a stock that investors should avoid for now.
SOFI Stock Down Because of Student Loan Worries
On Mar. 17, the Biden administration quietly extended the federal student loan payment moratorium. Instead of expiring on May 1, investors have no idea when companies may ask borrowers to pay back the $1.6 trillion in student loans. This removes a near-term catalyst that would have given suffering SoFi shareholders a reason to celebrate.
Students have no incentive to pay back their loans. The delay will distract SoFi from its other growth commitments. For example, its home lending business is also growing at a slower rate than was expected. Home prices skyrocketed during the pandemic. Supply is too low to meet demand. The imbalance is hurting mortgage volumes, which weakens SoFi’s lending business.
To bolster its best-of-breed products as a one-stop-shop financial services site, SoFi acquired Technisys. The all-stock deal cost shareholders $1.1 billion. Sofi said the technology would integrate with Galileo. It will create around $75 million to $85 million in cost savings from 2023 to 2025. The company expects savings to slow to between $60 million to $70 million annually after 2025.
Technisys Gives Sofi an Edge
SoFi will enhance the SoFi/Galileo business with Technisys. It creates an end-to-end vertically integrated banking technology. Customers will enjoy a seamless user interface. In addition, the company may customize multi-product banking. For example, it may integrate bank card issuance with other SoFi products. Customers can also get Galileo and Technisys partner products.
SoFi forecasts modest cost savings from the deal. Realistically, the acquisition should accelerate its revenue growth rate in the next three years. Customers will get better service with Galileo’s consumer fintech platform. As it adds more customers, SoFi has a chance to sell more products. This should expand its operating margins through 2025.
Compared to its competitors, SOFI stock shares trade at a steep premium. The price-to-sales in the last twelve months is at least double that of firms in the benchmark.
Opportunity
The fintech is counting on strong member and product growth. Chief Executive Officer Anthony Noto said that its members need to trust the firm. As it becomes a household brand name, SoFi may leverage its brand reach.
SoFi is demonstrating customer growth as advertising efforts drop. In fourth quarter (Q4) 2021, total sales and marketing spent per new member fell by almost 20% sequentially. On a full-year basis, those costs fell by around 18% year-over-year in 2021.
Sofi modeled its guidance with the idea that the U.S. Federal Reserve would be raising rates by five times in 2022. It expects a contribution margin range of 40% to 50% for its lending business. This is achievable. Sofi has a diversified product offering. It is actively managing interest rates and credit risks with hedges. This includes hedging its loans on the balance sheet.
Risks
According to the multiple valuations model, SOFI stock has a fair value of $7.75. Investors should consider betting on established firms whose stock price dips during the market correction.
For instance, Visa (NYSE:V) is a safe bet. The credit card firm serves customers globally. Furthermore, transaction volumes are surging in the post-pandemic scenario. Visa said in its last few conference calls that cross-border travel in Europe will lift card usage. Similarly, Mastercard (NYSE:MA) is a strong credit card brand. It will also benefit from higher spending activity this year.
Traditional banking firms are inexpensive. Citigroup (NYSE:C) trades at a price-to-earnings in the mid-single digits. The stock also pays a dividend of $2.04 a share. SoFi touts itself as a growth fintech. Instead of dividends, investors are betting on the company’s operating profits to justify a higher stock price.
Investors should consider building a core holding in Visa, Mastercard, and Citigroup shares first. Since SoFi is speculative, its upside prospects are anything but certain.
Investors should not ignore the poor quality and value that Sofi stock offers.
According to Stock Rover, SoFi scores poorly on quality and value. It expects Q1 adjusted net revenue of $280 million to $285 million. The outlook includes a $30 million to $35 million negative impact on revenue from the federal student loan payment moratorium. SoFi’s weak growth score accounts for the delay.
Be Wary of Sofi Stock
Sofi is still a company that needs to prove itself. This could take many quarters.
Amid a tighter interest rate environment, favor traditional financial firms over fintech. The established brands have more experience weathering the uncertainties ahead. Be wary of SoFi’s near-term prospects as it absorbs the Technisys acquisition. It must also wait beyond May 1 before students pay back their loans.
On the date of publication, Chris Lau 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.
