- The market’s recent rebound has pushed SoFi Technologies (SOFI) back near $10 per share
- While it may seem like the fintech firm has bottomed out, there could be greater downside risk than there was just a few months ago
- Hold off for now, but consider buying if it drops to low single-digit prices
After falling throughout 2022, stocks have been climbing back. Shares in SoFi Technologies (NASDAQ:SOFI) are no exception. After dropping as low as $7.74 per share, SOFI stock is now back up to around $9.50.
But while it may seem like the selloff is over, that could be far from the case. Investors seem to have accepted Jerome Powell’s narrative that the Federal Reserve can raise rates without causing a recession, but there’s a strong chance this won’t be the case. If a recession appears likely, the market’s rally will reverse ahead of an economic downturn.
In the case of SoFi, this wouldn’t just hurt its stock price. A recession, especially one driven by a rapid increase in interest rates, will affect this financial technology (fintech) firm’s loan origination growth. It may also delay its move out of the red.
That said, near-term challenges don’t automatically mean “game over.” At a cheap enough price, SOFI stock may prove profitable over a multi-year timeframe.
| SOFI | SoFi Technologies | $9.52 |
Why Its Latest Move Higher Might Not Last
Taking a look at SoFi on a chart, and you may think now’s a great time to enter a position. Finding a floor in the high single-digits, it looks like it may have bottomed out. It might not move back to past price levels, but a partial recovery could be in order.
With this, my prior advice to wait for a drop to penny stock levels may seem overly pessimistic. However, what if there is an even greater chance of this scenario happening now?
Again, the Federal Reserve’s plan to orchestrate a “soft landing” could fail. As a Wall Street Journal commentator recently argued, this attempt differs from that of decades past. Getting inflation down to its 2% target may prove impossible without triggering a recession.
If this bearish forecast appears increasingly likely to play out, markets will pull back again. SoFi will make a return to its recent low — and perhaps fall further — as the market becomes more pessimistic.
Buy if SOFI Stock Reaches Penny Stock Territory
It’s important to note the emerging recession risk with SOFI stock is in addition to existing risks. Like I’ve said previously, other issues threaten its chances to become profitable.
For instance, it could continue to spend heavily in order to maintain its membership base. In addition, its amount of share-based compensation as a percentage of revenue could remain far higher than that of its peers.
Even if these challenges enable it to reach the point of profitability, there’s something else that could limit upside. The market could eventually value it more like a bank than like a fintech company. It could see a low price-to-earnings (P/E) multiple once it becomes profitable — think 10x to 15x instead of a 20x to 30x multiple.
Then again, if you can get in at a low enough price, the potential upside could far outweigh downside risk. Theoretically, let’s say concerns of a recession cause my penny stock thesis to play out. At this price, near-term challenges from a recession could be fully priced-in. Riding out the rough patch, SOFI stock can thrive during the recovery.
Sit Tight With SOFI Stock for Now
For 2024, sell-side estimates for SoFi’s earnings range from 1 cent to 34 cents per share. If an economic downturn simply delays it hitting earnings as high as 34 cents per share, after a move below $5 per share, it could bounce back to high single-digits. That’s assuming it maintains a fintech valuation rather than a bank valuation.
If you’re buying today, that’s bad news. But if you get in at well below $5 per share, it would result in a profitable exit. Yes, it’s tough to time the market. A move to bargain basement prices may never arrive.
Still, keep SOFI stock on your radar, pouncing only if it falls to a “can’t miss” price. With the chance the specter of a recession will ratchet up again, the opportunity to get shares very cheap could emerge.
On the date of publication, Thomas Niel 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.
