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SoFi technology (NASDAQ:SOFI) Investors had a great February, with the fintech stock soaring nearly 15% after SoFi reported faster-than-expected earnings in its fourth-quarter earnings report.
But SoFi stock is giving back all those gains today, and more. As of 11:20 a.m. ET, the stock is down 11.5% on news that SoFi is taking on $750 million in new debt using stock market gains.
What is SoFi doing today?
SoFi announced this morning that it intends to issue $750 million worth of convertible notes due in 2029 to anonymous retail investors, with an over-allotment option that would bring the total bond issue to $862.5 million. did. The company has not disclosed what interest rate it will pay on this debt. Still, it’s strange that SoFi felt compelled to make this particular bond issue when most of the stock market is convinced that interest rates will be cut significantly later this year. right now There’s no need to wait for interest rates to improve.
This seems to suggest that the company feels cash-strapped, which is potentially bad news for investors, and why investors are reacting negatively to this news. could be an explanation. Additionally, the fact that this is a convertible bond implies that at some point in the future, this debt may turn into equity, diluting some of the shareholder’s ownership in the company.
That may be another reason why investors are upset.
Why are investors wrong about SoFi?
But now let’s look behind the scenes.
SoFi said it intends to use some of the cash raised from the bond issue to redeem certain preferred stock that already pay the company a 12.5% annual dividend.Therefore, unless the interest rate on the convertible note exceeds his 12.5%, this deal could potentially decrease SoFi charges interest — and because of it. increase Its profit.
In addition, other proceeds from this offering will be used to enter into what the company refers to as a “capped call transaction.” What this means, on a less technical note, is that SoFi “mitigates the potential dilution of his SoFi common stock upon conversion of the notes.”
Simply put, seeing a company take on new debt, especially convertible debt, can spook investors, but in this case, the news may not be as bad as it seems. SoFi is currently on track to report its first profitable year in 2024 (earnings per share he expects to be $0.07) and to grow its earnings significantly in the future, so long-term investors should take note of today’s short-term It may be tempting to view a decline as a possibility. Opportunity to buy.
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Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
Why SoFi Technologies Stock Got Slammed Today was originally published by The Motley Fool
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