SoFi Technologies (NASDAQ:SOFI) stock has failed to rebound. While the Nasdaq and S&P500 enjoyed a great rally at the end of Q1, SOFI shares had plummeted 26.6% over the same period.
The poor share price performance is because of a worsening macroeconomic picture and SoFi’s decision to raise $750 million in convertible debt capital. SOFI has outperformed the broad market indices, appreciating over 4% in Q2. SOFI is expected to underperform the market in the coming months. Here are three reasons SOFI isn’t a buy.
Macroeconomic Picture Isn’t Looking Great Anymore
U.S. equities had a terrible trading session last week. The Nasdaq fell 3.55%, while the S&P500 had fallen 3.05%. On a year-to-date basis, the Nasdaq and S&P500 have only risen 3.93% and 4.14%, respectively, as of last Friday. The reason is interest rates.
After two months of higher-than-expected CPI reports, Federal Reserve (“Fed”) officials, including Fed chairman Jerome Powell have not shied away from signaling interest rates may have to be higher for longer.
SoFi’s long-term growth is sensitive to the trajectory of U.S. interest rates. Elevated rates can benefit SoFi’s loan business but increase the risk of loan defaults.
Not to mention, higher interest rates for a long period of time would not be good for the overall growth of the economy, which could eventually imperil the U.S. stock market broadly, including SOFI.
SOFI’s Valuation Is Still Too High
Despite all the downward price pressure for SOFI shares, something hasn’t changed one bit: SoFi’s expensive valuation.
The lending platform’s share price is reasonable based on its forward price-to-revenue multiple of 3.4x, but its forward-looking price-to-earnings multiple is too high. SoFi’s growth is slowing, and without controlling expenses, net income will suffer. This could lead to an elevated valuation for foreseeable future.
U.S. equities are trading at stretched multiples broadly, and at one point or another, trading multiples will have to come down to saner levels. The market rout of last week is a symptom of the extreme volatility that may continue to rattle equities for some time.
Downgrades and SOFI Stock
Wall Street firms remain lukewarm about the performance potential of SoFi’s shares. There are about 16 analysts covering SOFI, and twelve of those analysts have rated SOFI as a “HOLD,” “Sell,” or “Strong Sell,” underscoring Wall Street’s lack of excitement for the stock.
As I reported in a prior article, the investment bank Jefferies is one of the five banks giving SOFI a “Buy” rating, but, still, equity research analysts at Jefferies cut their price target from $15/share to $12/share. Additionally, investment banking firm, Piper Sandler, decreased their price target.
Not everyone has a doom-and-gloom opinion. Some smaller Wall Street firms, including Keefe, Bruyette & Woods and Needham, have had more optimistic views on SOFI. It must be said, though, that given the company’s stretched valuation and the worsening macro environment, don’t take that risk.
On the date of publication, Tyrik Torres 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.
