Expect More Underwhelming Performance for SoFi Shares

Stock Market

As SoFi Technologies (NASDAQ:SOFI) stock falls back to around $15 per share, is now the time to buy? Not really. Over a long enough timeframe, entering a position in the fintech company’s shares right now could end up being a highly profitable move.

SOFI stock

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Assuming of course, that it becomes the next PayPal (NASDAQ:PYPL) or Square (NYSE:SQ). Even so, that doesn’t mean there’s an urgent need to rush out and buy it today. More likely than not, the stock will deliver underwhelming returns in the months ahead.

Why? The negative factors that have been weighing down on growth stocks. First, the risk that a hike in interest rates will result in a valuation contraction for richly priced names such as this one. Second, slowing economic growth could be another risk for shares. If today’s booming economy takes a breather, it may be tough for SoFi to deliver the blockbuster quarterly results investors expect from it.

With the possibility of it languishing at $15 per share. Or worse yet, falling to $10 per share or less, the best move hasn’t changed in the past month. If you’re still bullish on it? Take your time when it comes to entering a position.

SOFI Stock and Possible Further Downside

After its June 1 deSPACing, SoFi shares seemed primed to make a comeback. Not only that, it seemed like the reputation of Chamath Palihapitiya, the sponsor of this former SPAC (special purpose acquisition company) was making a comeback as well.

Yet, flash-forward around two months, and it seems like things are getting to where they were after last spring’s “SPAC Wipeout.” Investors haven’t shown much interest in Palihapitiya’s latest SPAC venture has been met with a yawn. Shares in his higher-profile holdings, like SOFI stock, along with Clover Health (NASDAQ:CLOV) stock have again lost their luster as well.

SoFi has fallen back once again. But don’t assume it’s bottomed out. Not as much to do with any issues with the company itself. Instead, due to economy-wide factors that may result in it making another move to lower price levels. Again, as I’ve discussed previously, rising interest rates could have a big negative impact on its share price. Even as rising rates will be good for the company’s lending operations, this could be more than countered by valuation contraction.

Giving things another look, it’s clear there’s another risk factor that could knock down the stock once again. That’s the potential for economic growth to start slowing down.

High Valuation

SOFI stock may be down big from its all-time high. But at today’s levels, it remains a “priced for perfection” situation. With projections calling for high double-digit growth, and recent results pointing to it beating guidance, investors continue to have no trouble giving this stock a rich valuation.

At $15 per share, shares trade for around 8.4x estimated 2022 revenues. Some, including InvestorPlace’s Larry Ramer, have questioned whether it makes sense to value this company more like a tech firm than a bank. I also see this as an area of concern. Yet I don’t expect this factor alone to be what knocks it down to lower prices.

What will? Again, it’s a sooner-than-expected rise in interest rates that could send shares down to even lower prices. But that’s not the only thing that could do so. Even if the Federal Reserve doesn’t turn on a dime, and shift from dovish to hawkish monetary policy, SOFI stock could find itself in trouble. How? If it starts delivering disappointing quarterly results.

Sure, this may not happen in the immediate future. Yet, the above-average economic growth seen during the pandemic recovery/reopening could be running out of gas. If the economy starts to slow? It may get tougher for SoFi to live up to the high expectations currently priced into shares. Along with the valuation contraction risk, this is something else that could it down before it starts to rally once again.

No Rush to Dive in at Today’s Prices

Now may seem like an opportune time to scoop up SoFi shares on the cheap. But after selling off again, I wouldn’t expect any sort of rapid recovery. Just like a few weeks back, the risk of valuation contraction runs high. As more comes out of today’s still-booming economy could be set to slow down? The risk of underwhelming results in future quarters is starting to loom as well.

So, with more negatives than positives, SOFI stock is likely to either going to trade sideways in the short term or worse, head down to lower prices. With this in mind, even investors who believe it’s a long-term winner shouldn’t hastily dive into it.

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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