In theory, the financial technology (fintech) space bodes well for SoFi Technologies (NASDAQ:SOFI), which offers many relevancies for the digital generation through its banking and personal finance businesses. However, SOFI stock hasn’t quite performed up to snuff. That is drawing interest for a possible reverse stock split. Nevertheless, investors have to balance the potential immediate benefit with long-term implications.
As InvestorPlace‘s Eddie Pan reports, SOFI stock closed in the green this past Tuesday when shareholders gave the board approval to potentially enact a reverse stock split. Per the company’s description, a reverse split involves a “proportionate decrease in the number, but not the total value, of shares of stock held by stockholders.”
SoFi has three main motivations for initiating a reverse split. First, the move would increase the price of SOFI stock. That would broaden its appeal to institutional investors who may otherwise be prohibited from acquiring low-priced securities.
This move may also improve perceptions of SOFI stock. At the time of this writing, shares trade hands just above $6. Usually, analysts regard anything at $5 or below as penny stock territory.
Lastly, a reverse split could help attract talent and partnerships to SoFi. A higher share price signals a serious business.
Nevertheless, not everything about a stock split is beneficial to the target entity.
SOFI Stock and the Other Side of the Split
To be clear, the board must ultimately decide whether the reverse stock split happens. However, assuming SoFi does move ahead with the proposed action, SOFI stock will likely encounter a mix of near-term benefits and longer-term complications.
The immediate impact would be to the per-share price. Management declared that the split’s ratio will be no lower than 1-for-2 shares but no more than 1-for-10 shares. It’s also possible that, within a few months of the split, institutional investors will put SOFI on their radars. From there, though, the matter gets dicey.
As NerdWallet points out, reverse stock splits often represent a sign to sell. In many cases, a given distressed public company will initiate a split to maintain its exchange-listing privileges. Of course, that doesn’t quite describe SOFI stock. But at the same time, because splits raise share prices without any fundamental changes to the underlying business, institutional investors will start asking questions.
Essentially, a split draws inquiries about motivations. For instance, one of the main concerns about SoFi is its profitability (or lack thereof). With net losses expanding from $252 million in 2018 to $484 million in 2021, investors are likely more concerned about the core fundamentals than the SOFI stock price.
Is a Reverse Split Just Pork Lipstick?
Although sparking a lift in share price may offer some temporary benefits, businesses can’t use gimmicks to cover up their fundamental issues indefinitely. For instance, a split won’t change the fact that SOFI stock is down about 60% year-to-date (YTD).
In other words, management has to bring substance to the table. Otherwise, further share price erosion could really draw questions from the very institutions SoFi is attempting to court with the split.
On the date of publication, Josh Enomoto 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.
