SoFi Technologies (NASDAQ:SOFI) may be set to become the next PayPal (NASDAQ:PYPL) or Square (NYSE:SQ). But, that’s at least years away from happening. This by itself won’t send SOFI stock soaring in the short-term.
A few weeks back, there was a factor that could have helped it surge back near its highs (around $28 per share) in the short-term. That was the fact its SPAC (special purpose acquisition company) merger wrapped up earlier than expected.
This sort of played out, as the stock briefly rallied to $25 per share (up from $20 per share, where its predecessor, Social Capital Hedosophia V closed at before the deSPACing on June 1). Yet, with this near-term trading opportunity wrapping-up, chances are it holds steady from here.
So, with the stock’s true “payoff” likely years down the road, is there reason to buy it today?
It depends. Positives in its corner that may enable shares, while richly priced, to hold steady at or near today’s price levels. On the flipside, this “story stock” could be at risk of a correction in the coming months.
How? If the current “transitory inflation” narrative fails to play out, and the Federal Reserve raises rates sooner than anticipated. This could cause the stock to pull back as investors reassess its valuation. With this in mind, even investors bullish on its long-term potential should tread carefully.
SOFI Stock Could Hold Steady, Despite Rich Valuation
Starting off as a student0 loan provider, this company is fast becoming one of the leading digital-first financial supermarkets. Other services offered by the fintech include personal loans and mortgages, as well as brokerage services. Not only that, it’s set to level up further, once it obtains a banking charter, via its acquisition of Golden Pacific Bancorp (OTCMKTS:GPBI).
To be sure, there’s a counter to these booming prospects. If you want exposure, you have to pay up for SOFI stock. At the recent $21 share price, it sports a market capitalization of around $18.06 billion. Compare that to the company’s 2021 revenue guidance ($980 million), and you’re entering in at a big premium (around 18.4 time sales).
Yet, this rich valuation may be worth it, considering its strong chances of becoming a leader in the fintech space. Combined with the company’s key backer, Chamath Palihapitiya, seeing his reputation among growth stock investors rebounding, may help the stock hang tight at or around $20 per share. With enough positives on its side, investors may be willing to give SoFi the time to live up to the high expectations set when the SPAC merger was first announced.
Still, investors approaching this as a long-term play should keep one major concern in mind. The Federal Reserve’s recent remarks may be helping to calm down inflation/interest rate fears. But, it’s a risk that could still sink growth stocks with high forward multiples (like this one).
One Major Factor May Cause Shares to Correct
Since February, concerns over rising inflation have rattled investors. Why? Due to the risk it’ll compel the Fed to raise interest rates much sooner than expected. As a result, several times this year, growth stocks have experienced temporary pullbacks. But, the Fed has been able to cool down concerns, and make statements that imply that it doesn’t plan to shift from dovish to hawkish monetary policy.
It’s done that by terming the recent increase in consumer prices as “transitory,” due to the economic reopening following Covid-19. This argument makes sense, given the pent-up demand, supply shocks, and tight labor market seen lately. For now, this “transitory” narrative could hold.
If prices continue to rise at an alarming rate? The Fed will likely have to take action (raise rates even sooner). Why is that bad news for SOFI stock? Sure, it may be good for its underlying business, especially as it transitions into something more akin to a bank. Increased interest rates make financial institutions more profitable. But, this could be countered by valuation contraction. When rates rise, growth stocks are at big risk of this happening, as their prices are built on future results.
The higher the interest rate, the larger the discount used to determine the present value of future earnings. This may result in this richly-priced stock heading lower, even as rising rates make its business more profitable.
Rate Uncertainty Suggests Only Ease Into New Position
The post-SPAC trading opportunity with SoFi may have come and gone. Long-minded investors, though, may still find it appealing. Shares may trade at a premium valuation today. But, if it lives up to expectations, it could one day trade for many times its current price.
Its long-term prospects are promising. But, considering the rising interest rate risk still on the table, the best move may be to ease into SOFI stock.
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, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.