SoFi Bulls Make Statement After $1.5 Billion Announcement Raises Concern

By any metric, SoFi SOFI is crushing it.

SoFi has gained 46% since our most recent buy recommendation on the stock, just one month ago. At the time, we set a target of $25 for the stock. That target was hit on Tuesday.

When the San Francisco-based digital finance company issued its second quarter report on Tuesday, SoFi didn’t just beat earnings estimates of .06, it crushed them with a result of .08.

Ditto for revenues, which were estimated to come in at around $804 million. SoFi trounced estimates with revenues of $858 million for the quarter.

What about forward guidance? For the full year, SoFi bumped its revenue estimate to $3.37 billion. That was above the high end of SoFi’s previous estimate, and well above Wall Street’s expectation of $3.29 billion. 

SoFi Falters After Reaching New Highs

SoFi provides credit cards, loans and other banking and investment products in an online environment. The stock has gained about 55% year to date, and has climbed 195% over the past 12 months.

Despite SoFi’s dominant quarter, there are concerns about the stock. SoFi climbed above $25 after Tuesday’s earnings report, only to backslide to $20.43 on Wednesday.

After Tuesday’s closing bell, with the stock trading at a three-year high, SoFi announced a common stock offering of $1.5 billion, with an option to increase that figure to $1.72 billion.

In a statement, SoFi said the funds are to be used for general corporate purposes and working capital — the usual boilerplate. Investors are concerned that the new offering could dilute already existing shares, much in the same way that increasing the money supply can devalue a currency. 

Here’s Why I’m Not Worried About SoFi

SoFi sold off on Tuesday on high volume, and the stock dropped another 2.3% on Wednesday.

Despite this, Wednesday’s price action was encouraging. SoFi opened near its low of the day, and closed near its high, as seen on the stock’s intraday chart:

This price action indicates SoFi bulls aren't about to surrender. Despite the volatile round-trip, by Wednesday’s close, SoFi shares were about 5% higher than they were prior to the earnings announcement.

The bigger picture, as seen on SoFi’s daily chart, shows a stock that is still in a bullish trend. SoFi is trading well above its 50-day moving average (blue), 200-day moving average (red), and bullish trendline (black dotted line). The stock has nearby support at $19.82 (solid green line).

Bottom Line

It might take time for SoFi to absorb the impact of new shares hitting the market, but raising capital is a normal function of young, fast-growing companies. I'm not going to allow short-term turbulence to shake me out of this name. SoFi has too much potential to let it go now, just as digital financial services are becoming mainstream.

At the time of publication, Ponsi was long SOFI.