Options Corner: SoFi Technologies’ Collapse Offers A Potential Contrarian Trade
One of the most actively traded securities on Tuesday, SoFi Technologies Inc (NASDAQ:SOFI) earned this distinction dubiously, with its security falling about 9%. Adding to the perplexing development is that there doesn’t seem to be a distinct catalyst for the implosion. Possibly, SOFI stock is responding to concerns associated with excessive valuations, along with weakness in the cryptocurrency sector. Still, the red ink may be hiding a contrarian opportunity.
Fundamentally, experts may point to the “rich” multiples that SOFI stock has attracted. Currently, SOFI trades for over 49-times forward earnings and almost 11-times trailing-year sales. To be sure, valuation ratios are not universal truth claims. When SoFi is labeled as “overvalued” or “priced for perfection,” you should keep in mind that this assertion is relative to a subjective framework.
In other words, if you change the framework, the definition of value would also change as well. However, it must be acknowledged that human emotions play into how an enterprise is perceived — and that perception can alter reality, a phenomenon known as reflexivity. So, if SOFI stock appears richly priced to enough people, that descriptor could end up being the defining label.
On a more tangible note, lingering crypto weakness could also be weighing the fintech specialist down. Sure, volatility in the blockchain ecosystem is not a new development. However, SoFi’s crypto service is a solid business for the brand. Anything that negatively disrupts that business — including extended bearish cycles — is liable to hurt SOFI stock.
Still, one point to hold onto is that reflexivity can work in either direction. While SOFI stock may have appeared overvalued, it’s also possible …
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