Even as the market looks up in 2023, taking some great stocks along with it and providing some relief for investors, many stocks are still well below their previous highs. SoFi Technologies (SOFI 3.69%) stock is up 26% in January, but it's 73% off its high from exactly two years ago just after its initial public offering (IPO).
At this price, it looks like it could be an incredible deal. But that's only if it has what it takes to keep climbing; otherwise, it might be a value trap. Let's see if some analysis can provide the answer to whether or not investors should consider SoFi stock right now.
Why SoFi excited investors when it went public
SoFi stands for social finance, and it represented a fresh look at finance, combining new technology with traditional services, when it first launched. It's quite the definition of a fintech company, offering updated financial services based on a digital infrastructure. Investors were impressed with the disruptive technology and huge market opportunity.
SoFi isn't the only player in this game, but it has carved out a niche in student financing. That allowed it to thrive even while up against the major names in banking and lending that have also been going digital. At the same time, it acquired a traditional bank to get a banking charter, allowing it to add banking services and offer a more complete financial experience for its mostly younger members.
Today, while student financing remains a major part of its business, it offers a broad array of services, such as personal banking, investing, credit cards, and mortgages. It's all available through one convenient app that makes it simpler for customers to manage their financial needs.
Growth has been tremendous and remains so despite the sagging economy. In the 2022 third quarter, net revenue increased 56% year over year to $424 million. Adjusted EBITDA reached a record $44 million, a 332% increase. It added more than 400,000 new members, or a 61% increase over last year, to 4.7 million.
This chart nicely illustrates how members are signing up for new products.
SoFi product adoptions. Image source: SoFi.
Why that's looking a little different today
So what's the catch? Unfortunately, when you dig a little deeper, there's much to be worried about right now.
Net loss ballooned from $30 million last year to $72 million this year. While management explained that a lot of that was due to warrant liabilities, indicating it's a short-term drawback that doesn't implicate its operations, the loss would have been $20 million even without them.
The economy of late has also been unkind to companies like SoFi. For one obvious thing, it is suffering through the student loan moratorium, which puts a pause on SoFi's ability to collect loans. It's also dealing with interest rate hikes, which raise the risk of loan defaults as well as lower the demand for new loans. And while its acquisition of Golden Pacific Bancorp last year gives it more flexibility and potential for more services, it also gives it more exposure to some of the risks associated with banking just at a time when those risks are playing out.
Is the risk worth the reward?
Getting back to whether or not this is a good deal, let's take a look at the valuation. Since SoFi isn't profitable and has negative cash flow, there aren't that many valuation metrics that work here. The price-to-sales ratio has come down to 3.7, which is cheap for a growth stock. Price-to-book value is just over 1, which isn't a particular bargain, especially considering that SoFi doesn't have the value and security of a traditional bank stock.
When factoring in all of these drawbacks together, SoFi looks quite risky right now. The growth story looks promising, but I wouldn't recommend buying while there's so much volatility associated with the entire model.
