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Here's Why Shares of SoFi Fell Nearly 30% in June

What happened

Shares of the one-stop-shop financial services company SoFi Technologies (NASDAQ: SOFI) fell nearly 30% in June for no apparent reason, other than the turmoil in the broader markets that has led to a big sell-off of stocks this year.

So what

In early June, new data showed that the consumer price index had risen 8.6% in May on a year-over-year basis. The index measures the prices of daily consumer goods and services and is closely watched by economists and other experts as a gauge for inflation. The rise was more than many had expected, suggesting that consumer prices had not yet peaked.

The new data led the Federal Reserve's rate-setting committee to raise its benchmark overnight lending rate, the federal funds rate, by 75 basis points (0.75%) in a massive move for the Fed.

Moves like this are not good for highly valued growth stocks like SoFi because they hurt the future earnings potential of stocks.

Furthermore, SoFi does a lot of consumer lending. The more aggressively the Fed has to raise rates, the more likely the economy is to tip into a recession. A recession could greatly increase consumer loan defaults or dry up demand for loans, which would not be good for SoFi's business overall.

Last week, Piper Sandler analyst Kevin Barker lowered his price target on SoFi, along with most estimates in the consumer finance space to reflect "economic reality."

What now

SoFi has always been a bit of a difficult stock for me to evaluate because while I like the business model, the valuation has always been incredibly high. SoFi at the end of the first quarter guided for $105 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Even after the big sell-off, that means SoFi still trades at roughly 47 times projected 2022 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), and the fact that it's an adjusted number also means there are some quirks baked into it.

The good news is that SoFi serves high-quality borrowers with high FICO scores and strong annual incomes that should be more resilient in a potential recession.

SoFi will also benefit once the student loan moratorium is eventually lifted and also has a tech business with Galileo and Technisys that will continue to diversify its earnings away from pure lending, even though the company still makes the bulk of its revenue from lending.

Ultimately, I like the business and the way it's trending but would like to see the valuation catch up a little bit.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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