The COVID-19 pandemic had an adverse effect on the financial industry as the deep uncertainty about economic activity led to the Fed cutting the federal funds rate to a range of 0% to 0.25%. However, last year, the Fed raised interest rates seven times, taking its benchmark interest rate to a range of 4.25% to 4.5% at its December meeting.

While most sectors suffered from a rising interest rate environment, financial institutions benefited primarily due to the positive correlation of their revenues with interest rates.

On the other hand, the Consumer Price Index's 6.5% increase over the previous year in December and a significant decline from the 9.1% peak in June show that inflation is cooling considerably. With inflation easing, the Fed signaled to slow the pace of rate increases this year. It is now more likely to slow down to a 25-basis-point hike at its first meeting of 2023.

As the Fed is expected to approve smaller rate hikes this year, financial companies’ profit margins might get pressured. Moreover, as the economic situation worsens, job cuts seem just the beginning of a wave of layoffs that could negatively impact Wall Street and the finance industry.

For example, Goldman Sachs Group, Inc. (GS) has already witnessed a round of layoffs affecting 3,200 employees, indicating 6.5% of its workforce. Moreover, BlackRock, Inc. (BLK), the biggest money manager in the world, also cut roughly 500 of its staff members from its payroll.

Against the backdrop, it could be wise to avoid fundamentally weak and beaten-down financial stocks SoFi Technologies, Inc. (SOFI) and Upstart Holdings, Inc. (UPST) before they topple even more.

SoFi Technologies, Inc. (SOFI)

SOFI offers digital financial services and operates through three segments, Lending; Technology Platform; and Financial Services. The company enables its clients to borrow, save, spend, and invest their funds. It also offers cash management, investment, and technological services. 

For the fiscal third quarter that ended September 30, 2022, SOFI’s total interest expenses increased 89.3% year-over-year to $40.19 million. Its loss before income taxes widened 149.3% from the year-ago value to $74.45 million.

In addition, the company’s net loss and net loss per share worsened 147% and 80% from the prior year’s quarter to $74.21 million and $0.09, respectively.

SOFI’s trailing-12-month net income margin of negative 28.81% compares to the industry average of 27.82%. Moreover, its trailing-12-month ROCE and ROTA of negative 9.16% and 2.47% compare to the industry averages of 11.59% and 1.16%, respectively.

For the fiscal year that ended December 2022, analysts expect SOFI to report a loss per share of $0.35. Moreover, the company is expected to report a loss per share of $0.17 for the current fiscal year ending December 2023. Shares of SOFI have slumped 8.6% over the past six months and 58.4% over the past year to close the last trading session at $5.44.

SOFI’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

The stock also has an F grade for Stability and Quality and a D for Value and Momentum. Within the F-rated Financial Services (Enterprise) industry, it ranks #102 of 106 stocks.

Beyond what we stated above, we also have SOFI ratings for Sentiment and Growth. Get all SOFI ratings here.

Upstart Holdings, Inc. (UPST)

UPST runs a lending platform powered by cloud-based artificial intelligence (AI) in the United States. Its platform aggregates consumer credit demand and connects it to its network of AI-enabled bank partners.

For the fiscal 2022 third quarter ended September 30, UPST’s total revenue decreased 31.2% year-over-year to $157.23 million. Its total operating expenses increased 7.7% from the year-ago value to $215.32 million. Its adjusted EBITDA loss came in at $14.36 million, compared to a profit of $59.14 million in the previous year’s period.

Moreover, the company’s adjusted net loss and loss per share stood at $19.27 million and $0.69, compared to an income and income per share of $57.45 million and $0.30 in the prior year’s quarter, respectively.

UPST’s trailing-12-month EBITDA margin of 2.18% is 89.9% lower than the 21.57% industry average. Likewise, the stock’s trailing 12-month net income of 0.55% is 98% lower than the industry average of 27.82%. Its trailing-12-month levered FCF margin of negative 47.47% compares to the 14.80% industry average.

Analysts expect a loss per share of $0.48 for the fiscal 2022 fourth quarter (ended December 2022). Moreover, the company’s revenue for the same quarter is expected to decrease 55.9% year-over-year to $134.45 million.

In addition, the company is expected to report a loss per share of $0.21 for the current quarter (ending March 2023), and its revenue is expected to decline 50% year-over-year to $155.04 million. The stock has plunged 32.4% over the past six months and 84.5% over the past year to close the last trading session at $16.99.

UPST’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, equating to Sell in our proprietary rating system.

The stock has an F grade for Stability, Growth, Sentiment, and Momentum. Within the same industry, it is ranked #96 of 106 stocks. Click here to see the additional rating of UPST for Quality and Value.

SOFI shares were trading at $5.44 per share on Monday afternoon, up $0.08 (+1.49%). Year-to-date, SOFI has gained 18.00%, versus a 4.20% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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