In August, it’s been another month, another dip lower for SoFi Technologies (NASDAQ:SOFI) stock.
The former special purpose acquisition company (SPAC) backed by Chamath Palihapitiya, has been on a downward slide since completing its merger with the up-and-coming digital-first financial supermarket.
Excitement over its “deSPACing” coupled with the second wave of “meme stock mania,” helped shares hit prices above $20 per share back in June. Today it’s changing hands for around $14.50 per share and looks set to fall down to its initial offering price of $10 per share.
This extended pullback has been bad news for investors who dived in when this stock peaked in popularity among traders active online. But if you’re just taking a look now, the opportunity to enter a long-term position may be on the verge of opening up. Assuming it falls below its SPAC offering price and into the single digits.
This up-and-coming fintech company is years away from giving rivals like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) a run for their money.
Dive in too soon and you could see heavy losses before you start seeing shares move up above your entry price. So given that market-wide factors could send it below $10 per share, it remains best to hold off buying.
What’s Been Driving SOFI Stock Lower in August
In July, the main factor behind the pullback in SoFi shares was likely the fading of the second “meme stock” wave. This month its recent disappointing quarterly results and guidance may have been the cause of its continued move to lower prices.
The results themselves for the quarter ending June 30 were mixed. Its revenue beat was countered by higher-than-expected losses, but what was the most concerning was its underwhelming guidance for the current quarter.
For Q3 2021 (ending Sep 30), the fintech rising star projects adjusted net revenue of between $245 and $255 million, well below analyst estimates that range between $257.3 million and $283 million.
With this, SOFI stock saw an immediate double-digit drop after the close on Aug 12. before bouncing to its current price. If it resumes its fall, shares are becoming less “priced for perfection,” as I put it back in July. But again, that doesn’t mean it’s a steal at its current price level.
Not only could shares continue to dive as investor sentiment shifts from positive to negative, but also a market correction could be on the horizon (more on that below).
If that happens, it may hit richly-priced growth stocks like this one the hardest, and shares may be at risk of falling down below their $10 per share SPAC offering price.
Another Factor Could Send SoFi To Single-Digits
Besides company-specific concerns, another factor that’s had me skeptical about SOFI stock has been the risk of an overall stock market correction.
Specifically, a correction, meltdown, or sell-off that hits richly-priced growth stocks like this one the hardest. Two factors, working together, enabled SoFi Technologies to sport a premium valuation.
First of course, is the company’s expected above-average rates of growth. As discussed above, its most recent guidance may signal that it’ll fall short of prior high expectations going forward.
Second, is the U.S. Federal Reserve’s aggressive monetary policy. To soften the blow of the pandemic, the Fed was willing to slash interest rates to near-zero, and provide ample liquidity.
As a result, investors were willing to keep on buying stocks, even as they hit historically high valuations. However, this factor that’s been on the side of SOFI stock may be changing as well.
Admittedly, while it’s planning to taper its bond purchase program, interest rate increases may still be more than a year away. I concede this calls into question my past thesis that sooner-than-expected rate hikes would cause the next market maelstrom.
But rate increases later rather than soon don’t necessarily mean markets aren’t ready to correct. Factors such as slowing earnings growth could cause one as well.
The next correction may not be on par with the March 2020 “coronavirus crash.” Yet it could mean a further rotation out of richly-valued stocks like this one and into more reasonably-priced names.
The Verdict: Wait and See for Now
SoFi may be down from its highs, but even at today’s deflated prices, it is overvalued.
The company’s forward price-to-sales multiple (11.3x) could see more compression. Whether from further adjustments to its growth projections or from a market correction that hurts richly-priced growth stocks more than stocks overall.
As a result, SOFI stock could make a move down to single-digit prices before it starts trending once again. So, what’s the way to play it, even if you’re bullish on its long-term prospect?
Continue to take a “wait and see” approach, at least until it falls down to $10 per share or less.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
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