Digital financial services company SoFi Technologies, Inc. (SOFI) reported third-quarter financial results with robust growth in members, products, and cross-buy. The company added 424,000 new members to end the quarter with 4.7 million total members, representing a 61% annual increase. Also, SOFI ended with approximately 7.2 million total products, up 69% year-over-year.

Anthony Noto, SOFI’s CEO, said, “Strength across all three of our business segments — Lending, Technology Platform and Financial Services — drove our record third quarter adjusted net revenue of $419 million and record adjusted EBITDA of over $44 million.”

Although SOFI demonstrated solid growth in the third quarter, its losses widened. The company recorded a net loss of $74.21 million, compared to $30.05 million in the prior year’s quarter. Its loss per share worsened by 80% year-over-year to $0.09.

The digital bank continues to suffer from the federal student loan moratorium extended by the Biden administration last November. Third-quarter student loan origination volume of $457.18 million declined 53% year-over-year. Also, home loan origination volume was $216.25 million, a 73% year-over-year decline. The housing market is struggling due to rising interest rates, which affected the company’s loan book.

After losing 71.3% over the past year, SOFI is now a penny stock. It is currently trading 72.7% below its 52-week high of $16.47, which it hit on January 20, 2022. The stock’s significant decline is attributed to its weak fundamentals and growing recession fears.

Here is what I think could influence SOFI’s performance in the upcoming months:

Mixed Financials

For the fiscal 2022 third quarter ended September 30, SOFI's total net revenue increased 55.9% year-over-year to $423.99 million. Its adjusted EBITDA amounted to $44.30 million, up 331.9% year-over-year. However, the company reported a net loss of $74.21 million, compared to $30.05 million in the year-ago quarter.

Furthermore, SOFI’s loss per share widened 80% year-over-year to $0.09. As of September 30, 2022, SOFI’s total liabilities stood at $10.33 billion versus $4.48 billion as of December 31, 2021.

Weak Growth Prospects

Analysts expect revenues to increase 52.1% year-over-year to $425.59 million in the fourth quarter (ending December 31, 2022). However, the company is expected to report a loss per share of $0.07 for the ongoing quarter. In addition, analysts expect the company's loss per share for the fiscal 2022 and 2023 to come in at $0.35 and $0.17, respectively.

Low Profitability

In terms of the trailing-12-month net income margin, SOFI’s negative 28.81% is lower than the 27.80% industry average. And its trailing-12-month ROCE and ROTA of negative 9.16% and 2.47% compare to the industry averages of 11.55% and 1.16%, respectively. 

Likewise, the stock’s trailing-12-month asset turnover ratio of 0.11% is 40.5% lower than the industry average of 0.19%.

POWR Ratings Reflect Bleak Prospects

SOFI's overall F rating translates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SOFI has a grade of F for Stability. The stock’s beta of 1.33 justifies the Stability grade. Also, it has an F grade for Quality, consistent with its lower-than-industry profitability metrics.

SOFI is ranked #96 out of 100 stocks in the F-rated Financial Services (Enterprise) industry

Beyond what I have stated above, we have also given SOFI grades for Sentiment, Growth, Value, and Momentum. Get all SOFI ratings here.

Bottom Line

Fintech company SOFI delivered solid progress in the fiscal 2022 third quarter, but its losses expanded. Furthermore, analysts expect the company to incur significant losses in fiscal 2022 and 2023 since the student loan moratorium is likely to weigh on its core business, and home loan originations are expected to suffer amid a rising interest rate environment.

The stock is currently trading below its 50-day and 200-day moving averages of $4.92 and $6.20, respectively, indicating a downtrend. Given SOFI’s deteriorating financials, bleak growth prospects, and low profitability, we think it could be wise to avoid this penny stock now.

How Does SoFi Technologies, Inc. (SOFI) Stack up Against Its Peers?

SOFI has an overall POWR Rating of F. One could also check out these other stocks within the Financial Services (Enterprise) industry: Forrester Research, Inc. (FORR) with an A (Strong Buy) rating and MGIC Investment Corporation (MTG) and South Plains Financial, Inc. (SPFI) with a B (Buy) rating.

SOFI shares rose $0.01 (+0.22%) in premarket trading Wednesday. Year-to-date, SOFI has declined -2.17%, versus a 0.12% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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