SoFi Technologies, Inc. (NASDAQ:SOFI) has lost its pre- and post-earnings sizzle, impacted by the recent banking crisis that took down Silicon Valley Bank (SIVB) and Signature Bank (SBNY).
As a financial services provider in the US, we believe it’s unavoidable that the risk-off selloff also affected SOFI, as astute investors leveraged its earnings surge to digest recent gains.
In our pre- and post-earnings write-up, we cautioned investors not to chase the euphoria in SOFI, as its price action was highly unconstructive. Hence, we aren’t surprised that SOFI stock has underperformed the S&P 500 (SPX) (SPY) since then, as investors reassess another entry opportunity for the Anthony Noto-led company.
Furthermore, we don’t expect SOFI to come under attack by depositors inflicting a bank run on SoFi Bank, as its uninsured deposits accounted for about 8% of its total deposit base.
Furthermore, “88% of [its deposits] came from direct deposit members, providing a sticky source of low-cost funding” for the company. As such, we believe the recent selloff was likely linked to possible contagion risks that could affect the sector broadly rather than company-specific.
Is it justified? With SOFI still reporting negative profitability, it makes sense that investors have turned cautious. Moreover, the Fed’s rapid rate hikes have resulted in unforeseen circumstances which blindsided the market.
While SOFI has communicated a path to GAAP profitability by the end of 2023, the recent selloff also impacted profitable Wall Street’s leading banks, including Bank of America or BofA (BAC), JPMorgan (JPM), and Citigroup (C).
As such, what could help turn the tide for SOFI moving ahead if it’s not at significant risk of a failure akin to SIVB and SBNY?
SoFi took on the Biden Administration by filing a lawsuit to allow SoFi to allow “repayment by borrowers who are not eligible for student-debt cancellation.” The company has suffered tremendously as it “lost up to $400 million in revenue and $200 million in profit” with the moratorium.
However, the Biden Administration remains adamant about canceling nearly $400B in student loans. President Biden stressed in a recent interview that a ruling against his administration’s bid would be “short-sighted.” He also expressed confidence that “the Supreme Court will rule in favor of the plan’s constitutionality.”
However, the Supreme court has expressed skepticism over whether President Biden could have overstepped his authority “without clear congressional authority.”
Notwithstanding, with a decision expected by June, buyers may not return in earnest in the near term, as the uncertainties weigh on restarting its student loans refinancing tailwinds.
With that in mind, investors who have conviction over a positive outcome from the Supreme Court by June can consider “front-running” these investors to buy the recent steep pullback.
However, has SOFI demonstrated more constructive price action that has attracted buyers to the fray to stem a further slide?
As seen above, SOFI fell nearly 40% from its post-earnings highs toward its recent March lows.
Hence, we assessed that overly optimistic buyers who chased its momentum surge were likely deflated, with some leaving the train, given the recent banking fallout.
With that in mind, it should have opened up a more attractive reward/risk opportunity for investors who were patient enough to wait for the post-earnings bubble to burst.
Despite the mayhem from this week’s banking crisis, we parsed that the selling pressure seems to have subsided. Buyers also appeared to have returned to absorb the intense selling pressure over the past four to five weeks.
Hence, SOFI could consolidate at the current levels, further bolstered by oversold momentum indicators.
We believe the current entry point would be much more favorable for SOFI buyers to add exposure.
If a broad-based contagion could be averted, coupled with a positive outcome from the Supreme Court case, SOFI could see more buyers enter the fray subsequently to drive its momentum back higher as investors refocus on its path toward GAAP profitability.
Rating: Speculative Buy (Revised from Hold).