Here's why SoFi's stock just logged its worst day on record

By Emily Bary

The company announced a convertible-note offering, which raises concerns about dilution

SoFi Technologies Inc. shares often take big swings after earnings, so it's notable that Tuesday's historic decline didn't come in the wake of financial results.

Rather, the 15.3% tumble in SoFi's stock (SOFI) Tuesday came as the financial-technology company announced it planned to offer $750 million in convertible senior notes that will be due in 2029. The announcement came on a day when technology stocks rode lower, with the Nasdaq Composite Index COMP down 1.7%.

Tuesday's drop made for SoFi's worst single-day percentage decline on record, surpassing the 14.2% decline seen Aug. 13, 2021.

"We largely attribute shares' weakness in Tuesday trading to technical pressures related to the assumed hedging of investors in the new convertible note offering," Keefe, Bruyette & Woods analyst Timothy Switzer said in a note to clients.

The issuance of new shares will boost SoFi's share count by about 6%, he said, and more dilution is possible due to the convertible notes.

But Switzer, who is bearish on SoFi's stock, said he views "the fundamental impact of the announced transactions fairly positively" as he estimates it could be accretive to net income to the tune of $34 million "primarily driven by the elimination of the preferred stock, partially offset by the new debt issuance."

The move allows SoFi to raise capital, helping ease the company's balance-sheet constraints, Switzer noted. In part, the transaction addresses "one of our primary concerns for SoFi's outlook, which is its ability to grow through its current capital constraints."

SoFi said in a Tuesday morning release that it planned to use part of the proceeds from the convertible offering to finance the cost of entering into capped-call transactions. It will use the balance of its net proceeds to pay fees related to the offering, redeem its 12.5% Series 1 preferred stock and handle other general corporate matters. Those may include repaying higher-cost debt.

Switzer is keeping his underperform rating and $6.50 target price on SoFi's stock.

"Overall, we continue to believe shares are trading at premium relative to [the company's] slowing revenue growth and rising credit risk," he said in his latest note.

-Emily Bary

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03-05-24 1612ET

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