Digital financial services company SoFi Technologies, Inc.’s (SOFI) shares got hammered amid high inflation and rising interest rates this year. The current macro environment is causing a persistent challenge for SOFI’s lending business.

Amid consecutive federal rate hikes, demand for loans has declined drastically in 2022. SOFI’s home loans came in at $216.25 million for the third quarter ended September 2022, down 72.7% year-over-year, while its student loans came in at $457.18 million, down 52.8% year-over-year.

However, Anthony Noto, SOFI’s CEO, said, “Our bank charter is enabling new flexibility that has proven even more valuable in light of the current macro environment, and the economic benefits are already starting to materialize and positively impact our operating and financial results.”

SOFI has gained 21.8% over the past month to close the last trading session at $5.99. However, it has lost 62.9% year-to-date and 74.3% over the past year.

Here is what could shape SOFI’s performance in the near term:

Consecutive Rate Hikes and Declining Mortgage Demand

Amid consecutive rate hikes, borrowing demand has plunged dramatically this year. Mortgage demand is hovering around its lowest levels since 1997.

According to Joel Kan, an MBA economist, “Elevated rates continue to put pressure on both purchase and refinance activity and have added to the ongoing affordability challenges impacting the broader housing market, as seen in the deteriorating trends in housing starts and home sales.”

Such grim industry circumstances might not bode well for SOFI.

Weak Bottom Line

For the third quarter that ended September 30, 2022, SOFI’s total net revenue came in at $423.99 million, up 55.9% year-over-year. However, its net loss came in at $74.21 million, up 147% year-over-year, while its loss per share came in at $0.09, up 80% year-over-year. Also, its cost of operations increased 19.4% year-over-year to $83.08 million.

Poor Profitability

SOFI’s trailing-12-month net income margin of negative 28.81% is lower than the industry average of 27.86%. Its trailing-12-month ROCE and ROTA of negative 9.16% and 2.47% are lower than the industry averages of 11.59% and 1.16%, respectively.

POWR Ratings Reflect Bleak Prospects

SOFI has an overall F rating, equating to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

SOFI has an F grade for Quality, consistent with its negative profitability margins.

It has a D grade for Value. Its forward Price/Sales of 3.60x is 24.8% higher than the industry average of 2.88x.

In the 108-stock Financial Services (Enterprise) industry, SOFI is ranked #104. The industry is rated F.

Click here for the additional POWR Ratings for SOFI (Growth, Momentum, Stability, Sentiment).

View all the top stocks in the Financial Services (Enterprise) industry here.

Bottom Line

SOFI has witnessed a significant drop in loan demand for its 2022 third quarter. Moreover, the stock is trading below its 200-day average of $7.24. Given its negative profitability and the ongoing macro headwinds, I think SOFI might be best avoided.

How Does SoFi Technologies, Inc. (SOFI) Stack up Against Its Peers?

While SOFI has an overall POWR Rating of F, one might consider looking at its industry peers, Forrester Research, Inc. (FORR), which has an overall A (Strong Buy) rating, and MGIC Investment Corporation (MTG), Everi Holdings Inc. (EVRI), and Nelnet, Inc. (NNI), which have an overall B (Buy) rating.

SOFI shares were trading at $5.89 per share on Tuesday afternoon, up $0.03 (+0.51%). Year-to-date, SOFI has declined -62.75%, versus a -15.82% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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