2023-05-15 12:38:03 ET
Summary
- SoFi Technologies, Inc. has received a downgrade from Wedbush.
- SoFi's management team hasn't got much skin in the game. And they are not buying shares in the open market. That is, aside from CEO Anthony Noto.
- I discuss SoFi's profitability and EBE. What is EBE? And why it matters when discussing SoFi's valuation.
Investment Thesis
The SoFi Technologies, Inc. ( SOFI ) share price has tumbled in the past few weeks. I recommend that investors don't chase these shares lower. Even as I read through Seeking Alpha and see that the bulk of analysts are extremely bullish on SOFI, I strongly recommend readers be cautious.
Let's assume for the sake of our discussion that I'm wrong. And that SoFi will go on to climb toward $10 per share and even higher. That climb towards $10 per share likely will take time. It will not happen overnight.
There are serious issues with SoFi. And I see very little value in attempting to get involved here and throwing good money after bad.
What's Happening Right Now?
In investing and in life, it's all about the nuance.
Above, I highlight 3 different fintech peers. Every one of them has questionable financials.
Yes, I've openly declared that I believe Upstart Holdings, Inc. ( UPST ) has the makings of a turnaround.
But I believe that Upstart is the exception, rather than the rule, in this sector. I know this space well, and I believe that there's very little quality among the other 3 names.
Nevertheless, animal spirits appear to have taken the sector by storm (once again), while leaving SoFi behind. Now, while I don't personally believe that SoFi is any worse than, say, Affirm Holdings, Inc. ( AFRM ), the fact remains that some analysts have turned very negative towards SoFi.
Insiders Are Voting With Their Wallets
Let's get some context:
If you click above, you'll see that the only significant shareholder here is CEO Anthony Noto. Asides from Noto, the rest of the management team has very little skin in the game.
And outside of Noto, there's nobody else buying shares in the open market.
SOFI Valuation - The Silliest Metric
During the Berkshire Hathaway Inc. ( BRK.B ) meeting, Warren Buffett highlighted a new financial metric; EBE (Earnings Before Everything).
And as I've gone through the comments of other analysts, I've noticed that many analysts highlight SoFi as being undervalued on a P/Sales basis. Allow me to state the obvious. EBE is not a real metric representative of underlying value. Nor is valuing a company based on future revenues. Particularly when the business isn't viable yet.
Here, my contention is not only about SoFi's stock-based compensation ("SBC") expense, which nearly equals its EBITDA figure at $64 million in Q1 2023.
But the fact remains that depreciation is a very real cost. And it's the worst type of cost. Why? Because it's a cost that goes out the door first, as a real cash expense, and gets recognized over time. And yet, depreciation only moves higher with time, as SoFi must continue investing for future growth.
To put it more concretely, I argue that SoFi's adjusted EBITDA figure is a mirage with minimal tangible value.
The Bottom Line
In the past, readers have criticized my negativity towards SoFi Technologies, Inc., claiming that I missed its ''true'' prospects. Today, the SOFI share price is within a few cents of its all-time lows.
I continue to assert that SoFi Technologies, Inc. investors should not look to continue averaging down. Even if I'm wrong and somehow SoFi returns to $10 per share or even higher, investors should not chase such high-risk high-return opportunities.
A better way to invest is to think about the underlying prospects of the business and seek out less ''exciting'' business prospects. Yes, this is sometimes viewed as boring. But true investing shouldn't be exciting. Compounding wealth takes a long time, and it's best to avoid unproven businesses.
In fact, I must state that in the past 2 years, I've grown 10 years older, as I've witnessed many businesses fall 50%, 60%, and often more than 90% from their highs. And the best lesson that I've learned to grow my wealth, is to imagine that I'm already wealthy and seek to preserve my wealth. Try this strategy.
For further details see:
SoFi: Approach With Caution