I bought the dip in SoFi Technologies (NASDAQ:SOFI) last year and have since lost half my investment.
I think it’s more appropriate to say I have lost half my speculation. While it’s true that SOFI has fallen by half since I bought it late last year, it’s not a loss until I sell my position.
I’m not selling because I believe in its hook, namely that CEO Anthony Noto can build a big banking brand using only the tools of marketing and the Internet. I may be wrong, but I didn’t buy for a quick profit. I bought for the slow build.
The SoFi Dip
SOFI stock opened for trade May 5 at about $7/share. It peaked in June and November last year at about $23/share. The price gives it a market cap of $5.4 billion on 2021 revenue nearly $1.1 billion, on which SoFi lost about $1/share.
SoFi stock fell for good reasons that I discounted when I was pushing it. It started life buying and reselling student loans, a tough business in a world of government forgiveness. It then got into packaging personal loans, again a tough business given the young demographic it was selling to.
Competing with banks as a re-seller, when money starts costing money, is not a great business. Banks get money from depositors, fintechs from investors. SoFi will next report earnings May 10, and while analysts expect a loss of 14 cents/share on revenue of $288 million, they’re telling their best customers the loss may be 18 cents. Honestly, it might be more.
To keep growing on the top line, SoFi may have to sell more stock. Its acquisitions are also mainly for stock, not cash. The resulting dilution will keep the stock under pressure.
SoFi is stretching its balance sheet to the limit. Its debt was 45% of its assets at the end of the year. There was less than $770 million of cash on the books. All financial technology, or fintech, stocks have plummeted in value this year. The days of skating past regulatory scrutiny are ending just as the cost of capital, relative to that of banks, goes up.
The SoFi Hook
A turning point for SoFi came in February when its purchase of Golden Pacific Bank closed. SoFi can now move from being a packager of loans to a real lender.
SoFi followed that up by buying Technisys, a bank software firm, for $1.1 billion. It also has Galileo, whose APIs let banks quickly spin-up Internet banking for their customers. Then there is no-fee stock trading, including crypto. This makes SoiFi a one-stop financial shop that can both retail and wholesale its services.
SoFi, meanwhile, is still trying to buy scale. It’s offering a 1.25% interest rate on savings, with no account or overdraft fees. It says it has 3.5 million customers, against 2.5 million last June.
The Bottom Line
Conventional wisdom on the banks vs. fintech debate has reversed. It’s now assumed that banks will win. They can use their financial power to make money while interest rates rise. Falling stock prices mean the cost of money to fintechs is rising faster. The banks should thus be able to scoop up fintechs on the cheap.
This is starting to happen. Truist (NYSE:TFC) is buying Long Game, which targets young savers with gamified financial products. It’s not just banks feasting on fintech, either. Cloud Czar Apple (NASDAQ:AAPL) has bought a British fintech.
To believe in SoFi stock today, you must believe that Noto can navigate these choppier waters, that he won’t be forced to sell the business to a JPMorgan Chase (NYSE:JPM) or Bank of America (NYSE:BAC), that he can break through in a crowded market.
I think he can, but I’m in the minority.
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