SOFI action: fundamental challenges require reading between the lines

Back when SoFi Technologies (NASDAQ:SOFI) was still a reverse merger target with a brilliant name, enthusiasm was sky-high for the Special Purpose Acquisition Company (SPAC) set to become the private equity unit of the fintech firm. On the one hand, the investing public couldn’t get enough of PSPCs, which catapulted SOFI stocks to sky-high heights.

At its closing peak, the stocks would cost you around $ 26 a piece. In large part, retail shoppers have jumped on the cult of Shamath Palihapitiya, one of the first Facebook (NASDAQ:FB) an executive who has become a venture capitalist. He sponsored several PSPCs which initially worked very well, creating more optimism about everything he touched. As speculation based on margin trading continued to hit new highs one after another, SOFI’s bullish trend came as no surprise.

But to be fair, it wasn’t just the PSPC element that intrigued investors. On the contrary, SoFi Technologies helps democratize access to capital by removing several points of consumer friction. In early May, I wrote the following:

Specifically, SoFi presents elements very similar to neobanks, which are physical institutions without branches that provide banking-like services. Because they don’t have the overhead costs associated with big banks, they can pass savings on to their members in the form of higher yielding savings accounts and other great rewards.

SoFi draws on this dynamic of demand. Additionally, its investment platform allows members to invest in stocks, exchange-traded funds (ETFs), and even cryptocurrencies. Therefore, SoFi is a financial service focused on the millennial mindset. Since this demographic is the largest of the US workforce, you can’t go wrong responding to this consumer base.

However, it was not possible to avoid speculation being the main driver of SOFI action. This is fine during a bullish phase. But in a panicked environment, it can lead to a flood of red ink. When the SPAC fever lost its appeal – especially those Palihapitiya sponsored – SoFi Technologies fell in sympathy.

Beware of the SOFI stock rebound argument

Lately, however, it looks like PSPCs are getting their mojo back. Not only the SOFI action is profitable, but its sponsor Palihapitiya is also Share capital Hedosophia Holdings. According to a Forbes article, the frenzied trade that social media forums sparked helped bring the so-called PSPC King back to billionaire status.

Considering the original SOFI stock amount when it came to the equity unit of a blank check company, you might be tempted to jump on this bandwagon. And while I can comfortably say that Palihapitiya isn’t giving my opinion on a rat’s butt, if I was in the position I would recommend that he secure his newfound billionaire status with hard cash.

According to a report by American banker, credit unions are wondering how to stimulate growth in fee income:

Third quarter [2019] Data from the National Credit Union Administration, the most recent information available, showed a 9.5% year-over-year increase in non-interest income, compared to a 5.5% growth in the previous year. during the year ending September 30, 2019. However, this figure – which includes gains from investments in credit union service organizations and other sources of income – masks a substantial decline in fee income , which fell by around 12%. This decline reflects the fact that not all credit unions participated in the paycheck protection program or benefited from the mortgage refinancing boom, both of which generated fee income. Many consumers also needed less overdraft protection thanks to stimulus checks and expanded unemployment benefits.

True, SoFi Technologies reported an increase of almost 6% in loan origination and sales for the first quarter of 2021 compared to the quarter of last year. But as American banker reported, several financial institutions have benefited from a boom in mortgage refinancing and paycheck protection program. These are two things that are probably not recurring.

Therefore, once circumstances normalize, it is unclear whether SOFI’s stock can meet its expectations.

Too many risks

Over the course of several Investor place articles, I expressed my opinion that deflation, not inflation, poses the greatest threat to our fragile economic recovery. One big reason I think it boils down to the math: America’s GDP has already hit $ 22 trillion, but the worker base (employment level) is still more than 4% lower than before. the pandemic.

Essentially, you’ve increased production from a lower assessment base. This is deflationary because it means that fewer people have jobs, which limits the ability of the economy to grow.

If this line of thinking is correct, then SOFI stock is facing serious problems. As I mentioned earlier, many financial institutions struggle to generate non-interest income. They will likely continue to struggle if deflation hits the economy.

In addition, a deflationary environment results in a decrease in the number of people wishing to take out loans. In this case, double-digit personal savings rates don’t help. This indicates that even in a supposedly inflationary ecosystem, most American consumers are saving their money, not spending it.

With so many fundamental questions deeply affecting SOFI stock, I’m going to drop this rally.

As of the date of publication, Josh Enomoto did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Former senior business analyst for Sony Electronics, Josh Enomoto has helped negotiate major contracts with Fortune Global 500 companies. Over the past several years, he has provided unique and essential information for the investment markets, as well as for various other sectors, including law, construction management and health.