As a massive name within the broader fintech and online personal finance space, SoFi Technologies (NASDAQ:SOFI) features long-term upside potential. In particular, the company resonates with its core audience of millennial and Generation Z clients. However, with rising economic challenges, SOFI stock appears richly priced. Combined with a possible pensiveness among smart money traders, I am near-term bearish on the fintech firm.
Economic Backdrop Doesn’t Endorse Buying SOFI Stock
On paper, circumstances seem bullish for SOFI stock. For one thing, the equities space continues to rise. Risk-on sentiment is robust, as evidenced by the cryptocurrency ecosystem. And the U.S. jobs market appears healthy, with February’s jobs report coming in hotter than expected. Still, underlying details suggest that not all is well.
In particular, the unemployment rate jumped to 3.9% from the prior 3.7%. Throughout this year, many high-profile companies have issued layoffs, especially in the technology sector. With fewer people having high-paying jobs, that may crimp the wider financial industry. However, SOFI stock may face greater pressure due to its lending exposure.
According to its latest earnings print for the fourth quarter of Fiscal 2023, SoFi’s gross (total) loans amounted to just over $23 billion. On the other hand, total deposits landed at $18.62 billion. Therefore, the fintech’s loan-to-deposit ratio stands at 123.5%. What this means is that the institution has more loans outstanding than deposits.
To be fair, that’s not necessarily a red flag alert. As well, SoFi has brought this metric down sharply from prior quarters. However, SOFI stock carries a higher risk profile, especially amid a questionable economic environment, which will bring up the valuation question.
Currently, shares trade at a forward earnings multiple of nearly 141x. Granted, that’s a significant improvement from the 769x multiple it carried in Q3. Nevertheless, major financial institutions typically don’t have such high valuations. Generally, investors expect low double-digit multiples.
Sure, one could make the argument that SOFI stock leans more into the tech side of fintech. In this case, the company’s price-to-sales ratio of 3.46x may seem reasonable. However, SOFI’s annual sales growth rate is fading, raising questions about the high premium.
Options Traders Aren’t Really Loving SoFi Technologies
Granted, opinions about SOFI stock are one thing; it’s quite another when assessing the implications behind real wagers placed on the security. In this case, SoFi’s biggest detractors appear to come from the smart money.
Looking at the put/call ratios on the open interest side for SOFI stock options, derivatives that expire on April 12 of this year feature a ratio of 1.23. Stated differently, more people are trading put options than calls. However, the ratio gradually starts to decline from the expiration date of April 19 onwards.
On the volume side, the metric stands at 1.08 for contracts expiring on March 15. As well, it’s relatively elevated for options expiring on April 12 before generally declining for further-expiry options. The implication? Traders appear to be pensive in the near term but more bullish in the longer term.
It’s difficult to say with absolute certainty what the real motivation behind the put/call ratio is. However, one possible explanation is that traders are buying “volatility insurance.” Stated differently, they may want to protect their position against downside risk; hence, the interest in near-expiry puts.
Further confirmation comes from options flow data. Here, two transactions that materialized on March 8 stood out: the acquisition of Mar 15 ’24 7.00 Puts (where traders paid a premium of $112,800) and the selling of May 17 ’24 9.00 Calls (where traders received a premium of $134,139).
So, one explanation is that the smart money sees a potential risk for SOFI stock to fall to $7. In addition, many don’t believe that SOFI stock will rise to $9 over the next several weeks.
Because of the tech sector layoffs and other economic jitters – such as stubbornly elevated inflation and high borrowing costs – it’s not unreasonable to believe that an online financial company may struggle. It’s starting to look like a jungle out there.
Don’t Get Distracted by the Noise
Again, with headline figures such as the soaring equities market, it’s easy to believe that everything is hunky dory with the economy. It may not be a doom-and-gloom narrative, certainly. However, it would likely be inaccurate to state that everything is going swimmingly well.
Credit card debt has skyrocketed to new heights. The companies issuing the plastic have noticed an increase in delinquency rates. People in good jobs are receiving pink slips. Price wars erupted in the once-vaunted EV space last year. These are not the signs of a sterling consumer economy.
Yes, SOFI stock undergirds a relevant fintech enterprise. No, it’s probably not worth a forward earnings multiple of 141x.
Is SOFI Stock a Buy, According to Analysts?
Turning to Wall Street, SOFI stock has a Hold consensus rating based on four Buys, eight Holds, and four Sell ratings. The average SOFI stock price target is $9.09, implying 18.4% upside potential.
SOFI Stock May be Great, but the Smart Money Is Waiting
While SOFI stock presents an intriguing fintech brand, the reality is that the wider economy doesn’t present the most encouraging picture. Where shares stand now, they appear overvalued. Perhaps the biggest sign of this overvaluation is options activity, which appears to show near-term pensiveness. Therefore, it may be best to wait out any potential volatile actions before moving in.
