On July 12, SoFi Technologies (SOFI) – Get SoFi Technologies Inc. Report will host its annual shareholder meeting. At the meeting, shareholders will vote on a variety of proposals such as the election of the board of directors, executive compensation, the ratification of the audit committee, the stock option and incentive plan, and a reverse stock split.
Reverse stock splits can have negative connotations and effects. So why is SoFi’s management pushing for one?
Figure 1: SOFI Stock: Here’s Why Management Is Pushing for a Reverse Stock Split
SoFi
(Read more from the Wall Street Memes: AMC Stock: Next Earnings Will Be Worth Watching)
Trying to Get Rid of the Penny Stock Label
If the reverse split proposal is approved, between two and 10 shares of outstanding stock will be combined into one share.
According to the company’s management, the split will help attract greater investor interest.
Trading around $5, SoFi is considered a penny stock today. Many institutional investors have internal policies about holding these low-priced stocks in their portfolios. According to SoFi, this has made funds reluctant to buy the company’s shares and has also encouraged brokerage firms to avoid recommending the stock.
In addition, the investment community often perceives lower-priced stocks like SoFi as risky, volatile, and speculative.
Possible Adverse Impacts
A reverse stock split is generally not well regarded by the investment community. Reverse splits tend to indicate that there’s a flaw in the company’s growth plan.
According to SoFi, there are risks that, even if the reverse stock split is approved, it won’t increase the company’s share price in the long term. Factors such as business performance and market conditions have a big effect on its stock.
Also, it’s possible that the market might have a negative reaction to news of the reverse split. As SoFi becomes less liquid — due to the reduction of the number of outstanding shares — it’s also likely that its shares may become more volatile.
Finally, shareholders who own fewer than 100 shares of SoFi may experience an increase in the cost of selling their shares, as well as difficulty in making such sales.
SoFi’s Insiders Are Buying Shares
It’s usually a good sign for investors when company insiders buy shares. It demonstrates that internal confidence about a company’s prospects is high. It also indicates that shares may be undervalued, based on the company’s business fundamentals and future potential.
So it’s worth noting that SoFi corporate insiders have bought about $2.7 million worth of shares in the last three months.
Fintech companies have been suffering from the turbulent macro environment that has caused investors to flee from riskier growth stocks. SoFi has made multibillion-dollar investments into its platform service model, yet it remains unprofitable.
SoFi investors now need proof that the worst days are behind them and that in the coming quarters they can expect to see long-term growth.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)