Fintech platform SoFi (NASDAQ:SOFI) has stumbled in recent days, selling off by more than 6 percent in less than a week after a year defined by blistering returns. Though SOFI shares are still in deeply positive territory for the year, the drop may concern some investors about the stock’s future. Why did SoFi stock drop, and what could the selloff signal about its future returns?
The Driving Force Behind SoFi’s Selloff
While many high-flying stocks are currently exhibiting elevated volatility due to market concerns around valuations and the ability of new technologies to drive earnings growth, SoFi’s recent drop had a much more straightforward cause. On December 4th, SoFi announced a $1.5 billion sale of new common stock. This new offering will substantially dilute the ownership stakes of existing shareholders, a fact reflected in the selloff that almost immediately followed the announcement.
It’s also worth noting that share dilution was something of an ongoing problem at SoFi even before the massive new public offering was announced. Year-over-year growth in the number of outstanding shares has held at double-digit rates since early 2024, rising to nearly 17 percent as of Q3 of this year.
To put the recent selloff into perspective, SoFi’s market cap is currently $33.5 billion. The larger problem, however, may be that the new stock offering shows management’s ongoing willingness to raise capital by diluting the shares owned by current investors. As such, the selloff seems to reflect both the level of dilution SoFi has already announced and the potential for further erosion in investors’ ownership stakes going forward.
Is SoFi Undervalued After Its Drop?
SoFi shares are still trading at a significant premium after the recent drop and are up more than 75 percent in the last 12 months. Shares of SOFI are still priced at 50.4 times trailing 12-month earnings, 7.5 times revenue and 21.7 times operating cash flow. This is largely to be expected, as the drop in share prices reflected the anticipated dilution more than an underlying weakness in the performance of the business or doubts about its future growth potential.
With that said, shares of SoFi are still above the average analyst price target of $27.15, with the current price of $27.78 implying a downside of about 3 percent. Analysts also appear to be somewhat skeptical about SOFI’s prospects at the moment. SOFI currently has 11 hold ratings, 5 buy ratings and two sell ratings.
It’s also interesting to note that institutional activity in SOFI in recent months appears to reflect a similar skepticism. Since February of this year, institutional investors have been selling shares at a significantly faster pace than they’ve been buying them. In the last six months, this has translated to a total of $5.5 billion in selling activity against just $3.4 billion worth of buying. While some of this selling activity may be explained by simple profit-taking, it’s also possible that the stock’s high valuation has started to raise concerns among institutional investors.
Can SoFi Outgrow Its Share Dilution?
The biggest question about SOFI at this point seems to be whether the business can grow quickly enough to both justify its premium valuation and outrun the dilution of its shares. To SoFi’s credit, the business has been able to deliver some fairly remarkable growth for its investors over the past year. In Q3, adjusted net revenue rose 38 percent to $950 million, an impressive result that was significantly outpaced by a 129 percent growth in net income to $139.4 million.
Just as impressive is the success SoFi has seen after retooling its business model to shift away from a tight focus on student loan financing in favor of a more diversified portfolio of financial services. With this model, SoFi has been able to create a business defined by both high levels of membership growth and the sale of new products to existing members. Over time, the cycle of attracting members and gradually increasing the number of products they use could allow SoFi to significantly increase the value of its average customer.
The results of this strategy were on display in Q3’s results. The number of SoFi members reached a record of 12.6 million last quarter, up 35 percent from the year-ago period. 40 percent of the new products opened during the quarter, however, were opened by existing members. As a result, annualized fee-based revenue rose to $1.6 billion. As SoFi keeps adding new members and new products, this virtuous cycle of value creation from the existing member base is likely to continue.
While all of this points to strong growth at SoFi, it’s difficult to ignore the effects of dilution on the stock. Even so, the rate of growth that SoFi could generate with its model of acting as a go-to financial services provider may prove to be enough to overcome the issuing of new shares. It’s worth noting that SOFI shares have defied the gravity of dilution up to this point, and even the significant selloff that has occurred in the past few days hasn’t been large enough to keep the stock from handily beating the overall market on a YTD basis.
Is SoFi a Buy, Sell or Hold Now?
In spite of dilution risks and a high valuation, SoFi’s revamped business model is performing remarkably well and driving high levels of revenue growth. Importantly, this growth has translated into current profitability, with SoFi delivering a trailing 12-month net margin of 14.4 percent. With probable further revenue growth ahead as SoFi’s base of users keeps expanding, the business could become a very attractive one over the next few years.
For investors comfortable with decent levels of risk in exchange for higher-than-average growth, SoFi may still be a stock worth looking at. Even more conservative investors, though, may want to watch SoFi for less expensive entry points on the strength of the underlying business. Although ongoing dilution and a high price tag shouldn’t be ignored, SoFi’s execution through its turnaround over the last couple of years and the potentially long runway still ahead of it could make the stock a chance worth taking for risk-tolerant investors chasing growth.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.