SoFi is down over 70% from its hi just half a year ago and it's getting dangerously close
to penny stock territory…so a reverse stock split could be on the horizon for SoFi but
what does that mean for you as an investor or a user of this platform?
Let's jump right into it.
what is going on everyone I hope you are all having a fantastic day.
So last week news broke that SoFi will hold a meeting on July 12th 2022 we're investors
will vote on whether or not the company can enact a reverse stock split and with the price
continuing to sink lower and lower they may not have much of a choice.
But what is a reverse stock split and why does that matter for SoFi as a whole.
Well similar to how companies will sometimes split their stock if the price goes too high,
a reverse stock split is the exact opposite of that where a company will consolidate the
number of existing shares meaning there will be fewer shares available but the price of
each share will go up.
There's a number of reasons that a company would do this but more often than not, it
is just because the price of the stock has gone too low and the company wants to incentivize
investors to buy by raising the stock price artificially in a sense.
And right now it's being reported that SoFi is considering a one to two ratio or a one
to 10 ratio meaning if one share of SoFi is $5 at the reverse split then it would immediately
jump to $10 if it was a one for two ratio, and it would jump all the way to $50 if it
was a one for 10 reverse.
Now I do want to clarify that the SoFi investors are simply voting on whether or not SoFi has
the power to enact a reverse split should they have to.
They are not voting on whether or not this reverse split would actually happen.
In fact SoFi’s CEO Anthony No-Toe was quoted saying “this is in case of emergency.
We're going through a dislocation now and we wanted to give our board the option if
we enter an even more irrational market...It in no way communicates our confidence in the
business or future.”
Take that with a grain of salt because he's the CEO of the company so what do you expect
him to say.
That being said, Anthony No-Toe has continued to purchase millions of dollars in SoFi stock
and as we’ve talked about in previous videos, typically insider buying means that they believe
the company is headed in a positive direction.
Okay so a reverse stock split is not necessarily a guarantee for SoFi at this point but again
why is this such a big deal for the company as a whole and if this were to happen, what
does it mean for us as investors.
Well to the first question, the magic number here is $5 per share and the reason I say
that is because despite their misleading name, generally any stock below $5 per share is
considered a penny stock.
And other than the fact that the price going down is generally a bad thing, when a stock
enters penny stock territory it can sometimes lead it to be delisted from certain exchanges
removed from funds, and in a lot of ways just devalues the stock across the board.
SoFi has briefly dipped below that $5 mark but over the past several weeks it has hovered
in the 5 to $7.00 range so technically not in penny stock territory just yet but definitely
close enough to make investors pretty nervous.
Now if a reverse stock split word to take place, for us as investors this really doesn't
mean a whole lot.
We may see some short-term price fluctuations as a result of a stock split or reverse stock
split in this case but the total value of our shares does not change the only difference
is you will now own fewer shares but each share is worth more.
So let's say right now you own 100 shares of SoFi at $5 per share for the sake of simplicity.
Well if there was a one for 10 reverse stock split that means that you would now only own
10 shares of SoFi but each share would now be worth $50.
So 100 shares at $5 per share is $500 total but 10 shares at $50 per share is also $500
total so at the end of the day it's the same pie you just have fewer larger pieces and
a normal forward stock split is the exact same way just in the opposite direction so
you would own more shares but each share would have a lower price per share.
Like I had mentioned, usually when a company does a reverse stock split, many view that
as a sign of financial stress or general panic within a company and while there may be some
of that going on here since SoFi is operating at razor thin margins since they are burning
money hand over fist to fund growth, I don't personally view a reverse stock split as a
panic button for SoFi investors.
as we have talked about in my many previous videos on this topic, the fundamentals for
SoFi are good.
They are continuing to grow at a rapid pace and have made some strategic acquisitions
of companies that have allowed them to stand well above their competitors.
Just a few months ago they received their national banking charter, launched some new
products as a result of that, and their recent quarterly financial reports have exceeded
estimates for most major metrics.
But general market fears, rising interest rates, Continued forbearance on student loans,
and a general beat down of tech stocks recently have taken a massive chunk out of SoFi’s
stock price.
If you want a more analytical breakdown of my thoughts on all of this, I have done several
previous videos talking about that but lets answer the question that many of you have
asked and that is what do I think of this potential reverse stock split and should we
as SoFi investors be concerned about it.
Well first of all, I'd say it's a 50/50 chance right now whether or not this will even happen.
Again SoFi’s CEO said that this is simply for emergency use if they have to save themselves
from penny stock territory.
In fact Anthony No-toes own words were “if we enter an even more irrational market”
which I think really sums up this entire conversation.
Yes there have been some negative catalysts that we’ve talked about at length but losing
over 70% from its highs for a company that financially is really healthy and is growing
at a rapid pace is just that…irrational.
it's unfortunate for retail investors like you and I who bought in on positive fundamentals
only to see our portfolios plummet but that's how it goes sometimes and I again want to
remind you as many of you have reminded me that you do not lose any money until you sell.
I'm not here to tell you what to do with your investment because as always that needs to
be your decision but here is my plan going forward with a potential reverse stock split
hanging in the balance.
Personally, I don't see this reverse stock split actually happening unless there was
some other completely unforeseen variable that we do not currently know about.
But with everything we currently know including the irrational market conditions, SoFi stock
appears to have found somewhat of a bottom and I think it would take a huge negative
catalyst to push the price well below $5 for an extended time.
Again that's just my opinion and I could be wrong as I have been many times before but
even if this reverse stock split were to take place, as I've said a million times this is
a long term investment for me meaning I don't plan on cashing in my chips for at least five
to ten years if not much longer.
That being said, it would not surprise me if the investors vote on July 12th to allow
SoFi the option to enact a reverse stock split.
Since this would be an emergency measure only, there's really no harm in having that option
in your back pocket should there be some random negative catalyst.
That way they could push the panic button if they had to and instantly double or 10X
the stock price by consolidating shares and while it would likely cause short term market
fluctuations since a lot of investors get a little weird about reverse stock splits,
ultimately it would even out and investors as well as the total market cap would be right
back where it was prior to that move.
But I guess we'll just have to wait until July 12th to see what the investors decide
to do.
Again if you want a really analytical breakdown of my thoughts on SoFi stock then I will link
to some of those previous videos below the like button but I also love to know what you
think of this stock right now and whether or not you think a reverse stock split will
actually happen for SoFi and what your game plan is going forward with so much uncertainty
surrounding this investment.
Be sure to check out some of my favorite financial tools using the links down below the like
button many of which will give you some free cash when you sign up which we always love.
As always thank you so much for your time I really do appreciate it so much take it
easy and I'll see you in the next one!