Sofi Reverse Split: Will the proposed reverse split go through?

Sofi Reverse Split: Sofi suffered 35% downside in the month of April 2022. The reason being that management updated 2022 revenue forecast and EBITDA for complete year downwards.

Combined with the bad global scenario, Sofi stock felt the heat. The current environment does not spare the good performing company’s stocks, so a company like Sofi was likely to be brutally hammered for missing estimates and lowering guidance.

While, the main reason is the Biden administration’s decision to postpone the end of the student loan moratorium that was implemented during a pandemic. We are discussing this fall because, at the first quarter result conference call, it appeared that Sofi’s management is thinking about doing a reverse split in the coming 12 months.

In this article, we will discuss the reasons for doing a reverse split, its impact on the company, and whether this makes Sofi Technologies a better buy post reverse split.

Sofi Reverse Split: Truth About Sofi Technologies’ Reverse Split

Let’s first discuss the facts related to hyped Sofi Technologies’ reverse split. The management has not announced a reverse split yet, and no, Sofi Technologies is not undergoing a reverse split in the immediate future.

In a filing with the Securities and Exchange Board, Sofi’s management has filed a proxy statement in which they intend to put up five proposals to its shareholders in the next shareholder’s meeting scheduled on 12^th July 2022 in order to increase the stock price and for better business performance in the future.

In these five proposals, one of the proposals is to give the Board of Directors discretionary powers to exercise reverse stock split in the next 12 months post this shareholder’s meeting without separate voting of shareholders for this specific purpose. It further states that the ratio of the reverse split can be anything between 1:2 to 1:10. This proposal if passed in the scheduled meeting, can expedite the process of executing the reverse split in the next 12 months.

It is imperative to understand that reverse splits do not add value to the company in any meaningful way. It just divides the outstanding shares by the ratio of the split and multiplies the share price in the same ratio. For Sofi Technology, the current number of outstanding shares is approximately 3 billion, and the share price is $7.38 (as of 26th May 12:20 GMT), the share price will increase and outstanding shares will reduce if a reverse split is executed, but it will not impact the market capitalization ($6.75 Billion).

Sofi Reverse Split: Latest Video

Sofi Reverse Split: Reasons for Reverse Stock Split

The basic purpose of a reverse split is to increase the share price, which has touched rock bottom due to unforeseen circumstances. For example, Sofi Technologies’ share price touched a high of $25 in January 2021, but since then it has plunged to new lows in every following quarter. It touched a low of $5.25 on 10th May 2022, before slightly recovering in the last fortnight. A SoFi reverse split will increase the share price back to $25 (in case of a 1:5 stock split) or even more if the ratio is increased.

Technically, a reverse split is not different from a forward split (normal split) and it is only meant to create a physiological impact on the investors. Just like investors feel uncomfortable with a very high share price (above $1000), they feel uneasy if the share price falls below $10. A sincere investor will think twice before investing in such a stock. A low-priced stock is only meant for speculation and not for investing- is the belief in the share market. So, this SoFi reverse split is a measure by the management to change that perception in the minds of investors and make it a safe investment in the coming future.

Hedge funds and mutual funds do not show interest in the penny stock. A stock with a price below $5 is termed as a penny stock by hedge funds and mutual funds managers and they do show minimal interest in picking and adding those stocks to their portfolios. To be termed as penny stock is detrimental to the image of the company. Moreover, a better percentage in the name of hedge funds in the shareholding pattern makes a company a good investment for the retail people. Sofi Technologies was on verge of being declared a penny stock after touching a low of $5.25 and hence management put up this proposal to fasten the process of a reverse stock split if required in the future.

Sofi Reverse Split: Does Reverse Split make Sofi Technologies a Better Buy?

The answer to the above question in simplest terms is a big “NO”. A reverse split does not add value to the stock and hence it cannot be used as a measure for deciding whether to buy a stock or not. It can only create a short-term bullish push as it created for Sofi Technologies (stock is up by 17% in last month as of this writing), but it is not guaranteed that stock price will stay at that level just due to the reverse stock split.

For Sofi Technologies, the business is doing pretty well and it is experiencing an increasing customer base with every passing quarter. Sofi is growing fast and the cry about the reduced guidance is not justified as lowered guidance still amounts to 45% revenue growth and about 200% EBITDA growth. More importantly, it grew membership at 87% in the last quarter, showing that its products are well received in the marketplace.

Along with student refinancing, it has added various new products like personal loans, home loans, and investing brokerage. It recently received a bank license enabling it to offer loans at lower interest rates. The only headwind for Sofi is the delayed student loan repayment, which will come surely at a later stage, and hence the problem is only short-lived.

Sofi Reverse Split: Conclusion

It is true that Sofi has plunged in the recent past, but it is a global phenomenon and this bear market has hit everybody hard. Netflix fell by more than 40% post-declaring results. Google, Amazon, and nearly every top company have seen a fall in the past six months.

To initiate a reverse stock split to dodge falling share price by Sofi’s management is not a good decision. It creates a perception that something is going wrong with the company on the business level.

Sofi is a fintech company and such stocks do grow through bad cycles at times. But keep in mind that Sofi is doing above par in terms of the company’s performance. A reverse stock split is not justified at this juncture and moreover, an investor should add Sofi’s stock if he believes in the company’s growth story and not due to a reverse stock split.

Vineet Agarwal

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