Is SOFI stock a wise investment choice?

Despite its recent decline of more than 27% year-to-date (YTD), purchasing SOFI shares might not be advisable at this point.

SoFi Technologies (NASDAQ:SOFI) has struggled to recover, contrasting with the notable gains seen in the Nasdaq and S&P500 indices by the end of Q1. During the same period, SOFI shares experienced a significant drop of 26.6%.

The Share Price

This decline in share price can be attributed to both a deteriorating macroeconomic outlook and SoFi's decision to raise $750 million in convertible debt capital. While SOFI has shown a slight improvement of over 4% in Q2, it is anticipated to continue lagging behind the market in the foreseeable future. Here are three reasons why SOFI may not be a sound investment option.

The Macroeconomic Landscape The recent trading session witnessed a downturn in U.S. equities, with the Nasdaq falling by 3.55% and the S&P500 by 3.05%. Year-to-date, both indices have only experienced modest gains of 3.93% and 4.14%, respectively, primarily due to concerns about rising interest rates.

Following several months of higher-than-expected Consumer Price Index (CPI) reports, Federal Reserve (Fed) officials, including Fed Chairman Jerome Powell, have indicated the possibility of maintaining higher interest rates for an extended period.

SoFi's long-term growth prospects are closely tied to the trajectory of U.S. interest rates. While elevated rates could benefit SoFi's loan business, they also raise the risk of loan defaults. Prolonged high-interest rates may also hinder overall economic growth, potentially impacting the broader U.S. stock market, including SOFI.

SOFI's Valuation Concerns

Despite the downward pressure on SOFI shares, its valuation remains prohibitively high. While the company's share price appears reasonable based on its forward price-to-revenue multiple of 3.4x, its forward-looking price-to-earnings multiple remains inflated.

SOFI's growth is slowing, and without effective cost management, its net income may suffer. This could sustain an elevated valuation for the foreseeable future. Given that U.S. equities are already trading at elevated multiples, it's likely that trading multiples will eventually revert to more sustainable levels.

Wall Street analysts continue to exhibit tepid enthusiasm for SoFi's performance potential. Of the 16 analysts covering SOFI, twelve have rated it as either a "HOLD," "Sell," or "Strong Sell," indicating a lack of bullish sentiment.

While some firms, such as Jefferies, maintain a "Buy" rating for SOFI, there has been a downward revision of price targets by equity research analysts. Additionally, other investment banking firms, including Piper Sandler, have also reduced their price targets.

Despite more optimistic views from smaller Wall Street firms like Keefe, Bruyette & Woods and Needham, the prevailing stretched valuation and deteriorating macroeconomic conditions suggest that caution should be exercised when considering SOFI as an investment.