SoFi Stock Could Head Back To Penny Stock Territory (NASDAQ:SOFI)

SoFi Technologies, Inc. (NASDAQ:SOFI) saw a significant increase in its stock price following the fintech’s fourth-quarter earnings. SOFI stock is up 18% since earnings, owing primarily to investors’ positive reaction to the adjusted EBITDA outlook.

Having said that, I continue to consider SoFi Technologies to be hopelessly overpriced, given the fintech’s inability to generate positive net income in the fourth quarter.

While it is true that SOFI is experiencing strong customer interest and is successfully generating a large number of new accounts, I believe that SOFI’s gains are not sustainable given the lack of underlying profitability, and I predict that SOFI will soon be a penny stock again.

Where Is The Competitive Advantage?

Fintechs have become popular in recent years as investor capital has poured into the sector, allowing a number of companies to conduct high-priced SPAC transactions. In our particular instance, SOFI went public through a special-purpose acquisition vehicle supported by a venture capital investor led by Chamath Palihapitiya.

SOFI gained 12% on its first day of trading and closed at $22.65 due to investor enthusiasm for fintech companies and their growth prospects. However, since its Nasdaq debut in June 2021, the stock has lost 69% of its value and dipped into penny stock territory in the fourth quarter of 2022 as growth slowed and investors questioned the valuations they placed on fintech’s stock.

SOFI is expanding its sales and customer base, but this expansion is still costly, even after a 69% valuation cut. Importantly, this sales expansion has not resulted in net income profitability. SOFI generated $1.57 billion in net sales in 2022, representing a 60% YoY increase. In terms of sales, the overall trend is positive, and I see no reason to complain.

SOFI’s financial services portfolio is expanding, and the fintech is doing a good job of introducing new products to its customers through its mobile app. SOFI Money (Checking and Savings accounts), investment products, and credit cards are all popular products that have seen strong customer acceptance in recent years, including 4Q-22.

One of SOFI’s most popular products is its Checking and Savings account, which allows customers to earn 3.75% interest on deposits. However, I see nothing in SOFI’s product portfolio that suggests the company has a unique selling proposition, and even if SOFI’s deposit offer is appealing, it is hardly a product that banks like Bank of America (BAC) or Wells Fargo (WFC) lose sleep over.

What technology does SOFI own, and what specific products does SOFI offer its members that large Wall Street banks, or even provincial banks with a few branches, cannot?

I see no competitive advantages for SOFI, and as we will see, SOFI’s financial results do not justify a premium valuation.

Sales Multiple Not Justified Considering Persistent Net Losses

What worries me is that SOFI’s business is still losing money. Correct me if I’m wrong: SOFI is profitable on an ‘adjusted EBITDA basis’, which includes significant share-based expenses as well as other expenses such as interest on corporate borrowings and valuation changes in servicing rights.

SOFI lost $320.4 million in net income in 2022, increasing the fintech’s accumulated deficit to $1.50 billion. This figure, $1.50 billion, demonstrates how much money the company has lost in its history as a going concern. SOFI was founded in 2011 and has yet to generate a positive net income.

Even more concerning than the lack of underlying profitability is the fintech’s share-based expenses, which totaled an eye-watering $306 million. SOFI pays a lot of money to incentivize senior executives, as do many ‘sexy’ companies that are good at selling investors a traditional business model at a tech valuation. Given that SOFI is still losing money, I believe the amount of share-based expenses is excessive.

SOFI Is Set To Become A Penny Stock Again

SOFI’s stock is valued at 4.1x sales, which I believe is excessive given the fintech’s lack of a moat when compared to large banks like Bank of America, Citigroup, or Wells Fargo.

SOFI is growing its customer base faster than any of the large banks, but this isn’t enough to justify valuing a traditional banking business with a mobile app at 4.1x sales.

SOFI forecasts 25-30% sales growth in 2023, with the fintech potentially reaching $2.0 billion in sales. Having said that, I believe SOFI is still overvalued due to a lack of underlying profitability and competitive advantage.

If I had to bet, I would say SOFI will close its post-earnings gap and return to at least $6. The enthusiasm for SOFI’s sales growth guidance has already begun to wane, and I believe SOFI will eventually return to penny stock territory (below $5). SOFI would be valued at 2.9x at a $5 valuation, which is still very high.

Why SOFI Could Achieve A Higher Valuation

Buy-out speculation may boost SOFI’s stock price, but I doubt many banks would pay such a high premium for SOFI’s customer book and sales growth.

Banks like Wells Fargo or Bank of America also have much larger customer bases, so buying out an overpriced fintech at 4.1x sales and a relative small customer base of 5.2 million would probably make little sense.

Another factor that could boost the fintech’s stock price is a significant increase in profitability.

My Conclusion

SOFI’s stock rose following 4Q-22 earnings, but the rise, in my opinion, is neither justified nor sustainable. Despite strong sales growth, the fintech failed to achieve net income profitability in the fourth quarter, and the accumulated deficits grew even larger.

SOFI remains overvalued, and I believe investors who jump on the bandwagon here to make a quick buck are making a mistake.

I believe we will see a gap-close, which could drive the stock price down to $6, and I would not be surprised if SOFI returns to penny stock territory.

With no moat and no distinguishing technology, growth alone will not sustain SOFI’s stock price for long.