SOFI Stock Warning: Is It Time to Let Go of the Struggling Fintech?
· InvestorPlaceSoFi’s (NASDAQ:SOFI) competition continues to be strong, while its valuation is quite high and it is likely to be meaningfully hurt by actions taken by the Biden administration now and in the future. Given these points, I recommend that investors sell SOFI stock.
Tough Competition
On the consumer loan front, SoFi faces steep competition from numerous banks, including huge institutions like JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC), along with other major fintech players, including PayPal (NASDAQ:PYPL) and Affirm (NASDAQ:AFRM). And as I’ve noted in the past, many if not most of these companies, like SoFi, have their extensive apps for consumers.
Similarly, many other companies offer home mortgages and pay significant interest rates on consumer banking accounts. SoFi is vigorously trying to gain market share in both of those crowded businesses these days.
A Stretched Valuation and a Far Better Alternative
SoFi has a price/sales ratio of three, while analysts, on average, expect its earnings per share this year to only come in at 6 cents. Also noteworthy is that their mean estimate calls for its revenue to climb 22% this year.
Given the tough competition that the firm is facing in many of its markets, along with its low profit and its good but not great growth outlook, I believe that the valuation of SOFI stock is far from attractive.
With a price-sales ratio of about 2.1 and much higher profits than SoFi, PayPal is a much better buy in the fintech space. Moreover, PayPal’s forward price-earnings ratio is a tiny 11.5, while SoFi’s forward P/E ratio is a gargantuan 196.
Agreeing with me about the steep valuation of SOFI stock recently was investment bank Keefe, Bruyette & Woods. On Jan. 3, the bank cut its rating on SOFI stock to “underperform” from “market perform,” citing valuation.
Also importantly, however, the bank believes that SoFi’s financial results will come in significantly below analysts’ average estimates. And Keefe, Bruyette & Woods think that the risks faced by SoFi are more powerful than its opportunities at this point.
Continued Negative Moves by the Biden Administration
The Biden administration is continuing its policy of regularly forgiving small but significant packages of student loans.
For example, on Jan. 19, the administration stated that it would forgive almost $5 billion of student loans held by 74,000 consumers. The move raised “the total number of people whose debt was canceled through various actions to over 3.7M.”
SoFi, which has a large student loan business, has stated in the past that its financial results are harmed by moratoriums on student loan payments. That’s because it generates significant revenue from the refinancing of such loans, and nobody refinances loans on which they don’t have to make payments. Thus, it’s logical to assume that the firm will be hurt by the Biden administration’s forgiveness of millions of loans.
As we move closer to the election and the Biden administration intensifies its efforts to support President Joe Biden’s reelection, the administration’s forgiveness of student loans will likely accelerate, further undermining SoFi and SOFI stock. Further, if Biden is reelected and the administration does not have to worry as much about criticism of its forgiveness of student debt, it may very well accelerate the initiative to boost the president’s approval ratings.
On the date of publication, Larry Ramer 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.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.