SoFi Technologies’ (NASDAQ:SOFI) efforts to become a leading online bank are not off to a great start. The fintech company is running large operating losses and the value of SOFI stock has plummeted 63% so far this year.
However, many people haven’t given up on SoFi. That includes, importantly, the management team who stepped up to the plate and bought additional shares of SOFI stock as the price slid lower. InvestorPlace’s Eddie Pan recently detailed sizable insider purchases by CEO Anthony Noto and Director Harvey Schwartz.
Despite that positive sign, SoFi still faces challenges. Its large overhead and operating expenses make it tough for the company to earn money at its current size. And the continuing uncertainty around the student loan moratorium and potential forgiveness options also hinders SoFi’s ability to operate profitably.
Meanwhile, the slumping share price has led the company to float the idea of a possible reverse stock split. Historically, reverse stock splits are not associated with strong stock price performance.
| SOFI | SoFi Technologies | $5.91 |
The Stadium Curse Strikes Again
There has been a history of companies that shell out a ton of money on stadium naming rights going bust. Examples of the “stadium curse” include Enron Field, Invesco Field, the Adelphia Coliseum and Chesapeake Energy Arena, to name a few. Perhaps spending millions to see your name in lights is a sign of a company whose ambitions have run ahead of its financial reality.
In November, I pointed out that SoFi’s decision to pay more than $600 million for the naming rights to a football compound in Los Angeles was problematic since the company had yet to earn any actual profits.
“While SoFi’s core business model remains unproven, the company apparently has plenty of money to drop on a vanity marketing expense. That’s generally not a good recipe for long-term shareholder returns,” I wrote.
Now, the deal was announced while SoFi was still a private company. But since SOFI stock went public on June 1, 2021, via a reverse merger with merging with Social Capital Hedosophia Corp V, shares are down more than 70%.
SoFi Reports Significant Operating Losses
For the first quarter, SoFi Technologies reported an operating loss of $110 million on revenue of $330 million. That’s in line with the firm’s typical results. Here’s a look at SoFi’s quarterly results since going public:
| Revenue | Net Loss | |
| Q2 2021 | $231 million | $165 million |
| Q3 2021 | $272 million | $30 million |
| Q4 2021 | $286 million | $111 million |
| Q1 2022 | $330 million | $110 million |
In theory, SoFi’s losses should shrink as it grows in scale, but there’s little evidence of this yet in practice.
The company likes to point to adjusted earnings before interest, taxes, depreciation, and amortization or EBITDA, which was roughly $9 million in the first quarter. However, this is not a great metric for evaluating SoFi. After all, it is a bank and, thus, paying interest on deposits is a central operating expense. Judging a bank on its income without interest is like judging an airline’s earnings excluding the cost of jet fuel.
Student Debt Remains a Major Question Mark
SoFi got its start as a financial institution focused on the student lending market. This has become a burden since the pandemic as the federal government placed a moratorium on student loan payments. This has frozen a sizable chunk of SoFi’s business. Borrowers are not rushing to refinance student loans, and thus generate fees for SoFi, when a loan is not actively in repayment.
The possibility of student loan forgiveness is also a potential headwind for SoFi’s business. However, the prospect of $10,000 per borrower currently being considered by the Biden administration is less of a blow than the elimination of student debt would have been.
But even the will they/won’t they uncertainty is a drag on SOFI stock. Once a student debt relief package is agreed on, business can get back to normal for what remains student loan market.
The Bottom Line on SOFI Stock
There are at least three things that have improved for SOFI stock since last year. First, insiders are buying shares instead of selling them. That’s a reassuring sign. Second, the steep sell-off in SOFI stock has made the risk/reward picture considerably better than it was this time last year. And, finally, it appears the worst-case scenario for SoFi in terms of total student debt forgiveness is off the table.
Is this enough to make SOFI stock a buy today? For me, it’s not. This is still a deeply unprofitable business that is struggling to validate its strategic plan. With the stock market now punishing this sort of unprofitable growth investment, SoFi faces a tough road ahead.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.