SOFI Stock Falls From Post-Merger Highs, Could Recover From Lows

Social Finance or SoFi went public earlier this month through a merger with Chamath Palihapitiya’s Social Capital Hedosophia Holdings V (IPOE). In a welcome break, the stock, which trades under the ticker “SOFI,” rose sharply on the merger date. Since then, it has looked weak. Why is SOFI stock falling and will it slump like other SPACs sponsored by Palihapitiya?

SOFI stock fell over 8 percent on June 4 and was trading flat in the early price action on June 7. It isn't a sector-wide sell-off. Other fintech names like Square and Paysafe have risen in the last few trading sessions.

SOFI stock is falling amid concerns about its valuations. The stock was looking overvalued compared to other fintech names. As I noted previously, SOFI's valuation multiples looked out of sync with other recently listed fintech names.

While SOFI looks like a good stock to hold for the long term, the price wasn't right. Some of the other fintech names, like Affirm and Paysafe, seemed to offer better risk-reward tradeoffs.

The last few months haven’t been good for Palihapitiya. Clover Health, which merged with one of his SPACs, is still trading below $10 after it was accused by Hindenburg Research of fraud. Opendoor Technologies, the home-flipping platform that went public with a Palihapitiya SPAC, is down 58 percent from the peak.

Opendoor fell over 22 percent in May also even though there was some recovery in beaten-down growth names. Ark Invest, which is run by Cathie Wood, also took a stake in Opendoor stock. However, her faith hasn’t helped prevent a slide in Opendoor stock.

Virgin Galactic, the space tourism company, which was the first company to go public with a Palihapitiya SPAC, is also down almost half from the peaks. Palihapitiya faced flak after he sold shares in the company.

Looking at the other Palihapitiya SPACs, IPOE actually looks better placed. It's down around 26 percent from its pre-merger highs. Social Capital Hedosophia Holdings IV (IPOD) and Social Capital Hedosophia Holdings VI (IPOF), which are yet to merge, are down 42 percent and 43 percent from their 52-week highs.

The drawdown from 52-week highs is the lowest for IPOE compared to other Palihapitiya SPACs. However, the stock is facing resistance at higher levels and isn't holding at higher levels.

So far, only Oppenheimer has initiated coverage on SOFI with a buy rating and a $25 target price. The outlook for the fintech industry is bullish and SOFI is present across several verticals. It offers an array of services including student loans, mortgages, insurance, and credit cards.

It also offers stock trading services and competes with Robinhood. Many retail investors who weren't happy with Robinhood after it blocked trading in meme stocks in the first quarter talked about shifting to SOFI.

The company also allows crypto trading and has ventured into IPO investing for retail clients. Overall, I think that SOFI is a good business. From a valuation perspective, the stock looks like a buy below the $20 price level. There could be some buying interest in the stock soon as the post-merger sell-off seems to have run its course.