Cathie Wood, the CEO of investment firm Ark Invest, has long made a name for herself by making bold bets on technology companies that can significantly disrupt various industries. So it's not surprising to see Wood interested in SoFi Technologies (SOFI 1.49%). SoFi went public through a special purpose acquisition company in 2021, with plans to disrupt the banking space by offering consumers a branchless, one-stop shop that met all of their banking needs online and through various digital offerings.
SoFi has grown fast, surging to over $45 billion in assets, which essentially makes it the same size as a regional bank. The stock has also done incredibly well over the past year, up nearly 72% with a market cap of $34.6 billion. Ark Invest recently trimmed some of its SoFi holdings in the ARK Blockchain & Fintech Innovation ETF (ARKF 0.48%). Here are three potential reasons why.
Image source: Getty Images.
1. Ark Invest could be taking some profits
Ark Invest sold about 21,094 shares of SoFi in mid-December, likely for a total sale of around $550,000. This is a relatively small sale when you look at Ark's total SoFi holdings. As of this writing, SoFi is the ninth-largest holding in the ARK Blockchain & Fintech Innovation ETF, consuming 3.55% of the total portfolio. Ark's total position in SoFi is currently about $40.7 million.
This does not yet indicate significant sales, but rather suggests taking some profits before the end of the year. It could be to capitalize on some capital losses in Ark's broader portfolio, or to simply take some gains after SoFi's stock has risen as much as 92% this year.
2. SoFi's valuation is high
Any way you chop it, SoFi's stock looks expensive right now, in terms of valuation. As you can see in the chart below, SoFi is expensive on both a price-to-earnings and price-to-sales ratio.
Data by YCharts.
Additionally, SoFi stock trades at 33 times management's projected adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). While I'm sure the company can grow adjusted EBITDA in 2026, this still screams expensive.
Now, even if you are a believer in what SoFi has built, valuation is important. If a company trades at a high valuation, there is less margin for error, making the risk-reward proposition less attractive. And if SoFi doesn't execute, the stock could take a hit.
3. It's a big bet on the consumer
Ultimately, SoFi's banking business is heavily focused on consumers. The company offers bank accounts, an online retail brokerage, and various types of consumer loans, including personal lending, student lending, and mortgages. Over half of the company's revenue comes from the lending business, with most of it driven by personal loans.
NASDAQ: SOFI
Key Data Points
Credit quality could deteriorate, or consumer loan demand could dry up, if the economy begins to struggle, which many investors still consider a possibility. A significant portion of SoFi's revenue is actually dependent on the personal lending business. Due to a solid economy and consumers who have managed to keep spending, SoFi has also launched a loan platform business (LPB) over the past year, in which it originates loans to sell mainly to private credit firms.
In the third quarter, SoFi said that the LPB added $167.9 million to the company's adjusted net revenue, which amounts to another 17.5% of adjusted net revenue in the quarter. These are loans originated on behalf of third parties based on their defined credit criteria.
I suspect these are likely lower-quality loans that private credit is willing to take on in a strong economy. However, if interest rates rise and the cost of capital becomes more expensive, or a recession hits and credit quality deteriorates, I think the capital from these private credit firms could quickly dry up, especially in the LPB. If the LPB revenue proves unsustainable, investors will not place much value on it.
Ultimately, SoFi has achieved a great deal, but at this valuation, I believe the stock is vulnerable.
