Tread Carefully With SoFi Stock After Its Sharp Rebound

Stock Market
  • After briefly falling into penny stock territory, SoFi Technologies (NASDAQ:SOFI) zoomed back to a high above $8 a share.
  • The rebound, however, could prove to be little more than a “dead-cat bounce.”
  • Unprofitable growth stocks like SOFI stock are likely to fall further in this uncertain market.
SoFi headquarters. SOFI stock.

Source: Michael Vi / Shutterstock

For speculators who got the timing right, dabbling in SoFi Technologies (NASDAQ:SOFI) shares in recent days proved very profitable. After making a new 52-week low on May 10 below $5 per share, SOFI stock surged nearly 67% to a high above $8 on May 20.

The fintech firm fell into penny stock territory on the heels of disappointing guidance from artificial intelligence platform operator Upstart (NASDAQ:UPST). Yet, despite releasing its own mixed results shortly thereafter, shares rebounded.

But if you missed it at the bottom, don’t try to chase it. There’s a good chance the latest rally was simply a “dead-cat bounce” and SOFI stock could revisit its lows.

SOFI SoFi Technologies  $7.27

A Closer Look at the Big Swing in SOFI Stock

On May 10, Upstart’s latest results and guidance had a decidedly negative ripple effect on other fintech stocks, including SOFI stock. Then SoFi accidentally released its first-quarter results midday instead of after the close as scheduled. The company said the mistake was the result of human error, and it’s possible the blunder saved SOFI stock from experiencing an even greater plunge in price.

As mentioned, the earnings results were mixed. Q1 revenue came in ahead of estimates and losses were in line with expectations. However, the company walked back both its revenue and EBITDA guidance for the second quarter. Trading in SOFI stock was halted for almost three hours following the release.

When trading resumed, the market’s response was positive rather than negative. The fact that many analysts came to SoFi’ts defense post-earnings may be the reason for this.

There’s also the short-squeeze factor to consider. According to a Seeking Alpha commentator, short interest was around 22% before the earnings report and fell to around 20% in the week following the report. So it’s possible the shorts are either taking profit or cutting their losses by closing out positions.

Some traders might be tempted to jump into SOFI stock now in hopes the rally can continue. But given today’s nearly 3% decline in shares in the face of broader market strength and the high likelihood of continued market turbulence, SOFI stock is a risky bet.

Why SOFI Stock Could Give Back its Gains

If the broader market has truly bottomed out, SOFI stock could easily make it back to $8 or even $10 per share in short order. But that’s a big “if” and far from the most likely outcome.

Fears about inflation, rising interest rates and a possible recession are likely to continue to have a negative impact on stocks, especially speculative stocks, in the months ahead. There is also company-specific risk to consider, such as another extension of the student loan moratorium beyond this fall’s U.S. midterm elections. Taken together, this could put more downward pressure on SOFI stock, outweighing the potential reward of a short squeeze.

Investors should also keep in mind that the long-term upside potential of SoFi may be less impressive than it seems. As I discussed last month, profitability (in terms of GAAP net income) remains years away. Even if the company produces positive earnings, it may only be able to sustain a valuation of around $8.50 per share, at best.

Be Careful With SOFI Stock

At today’s price, SOFI stock may be close to trading at its long-term fair value. Keep in mind, though, that this is assuming that, once profitable, it trades at a fintech stock valuation. Given that it’s morphing into something more like a traditional bank, it may only be able to sport a bank-like earnings multiple in the long run. If that happens to be the case, SoFi’s potential value could be less than what it trades for today.

Having said all this, my view of this digital-first lending company may be short-sighted. Perhaps after getting out of the red a few years from now it continues to post impressive earnings. Perhaps it someday scales into something the size of  PayPal (NASDAQ:PYPL).

Nevertheless, even if you’re bullish on SOFI stock, you may want to hold off on buying it. Another market drawdown could push shares back below $5, which would provide a much better entry price.

On the date of publication, Thomas Niel did not hold (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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