1 Reason to Buy SoFi Stock After the Muddy Waters Short Report

Short-seller firm Muddy Waters recently asserted that SoFi Technologies (NASDAQ: SOFI) is engaging in financial shenanigans, to put it kindly, by inflating fair value gains in its portfolios.

SoFi has been a market darling for quite a while, averaging annual gains of 38% over the past three years. The stock is down nearly 51% from recent highs as I write this, though, in part due to concerns raised by Muddy Waters.

SoFi has been growing briskly. The fintech (financial technology) company is an online bank. It began as a student loan servicer, but it now offers everything from auto loan refinancing to personal loans, mortgages, credit cards, investments, and, of course, banking. It has been most focused on younger consumers, and is aiming to be a one-stop financial shop for them.

What's short-selling?

Most people invest in stocks hoping to buy low and sell high. That's the classic way to profit. But profits can also be made by reversing that order -- when you expect a stock to fall.

"Shorting" a stock involves this (legal) process, which I'm simplifying a bit: You short via your brokerage, which borrows shares of the stock you want to short and then sells them. Assuming the shares do drop, you buy them back later at their lower price and replace the borrowed ones.

He said, she said

Should you, too, short SoFi Technologies -- or invest in it? Well, remember that when you short a stock, you have the company's management and workforce working against you, to make the company grow and succeed. If Muddy Waters is correct, SoFi is engaging in practices that should erode investor trust. The company has denied the allegations, though, and CEO Anthony Noto bought shares recently, reflecting confidence.

To be safe, you might wait until the dust settles and the truth comes out before investing in SoFi. Or you might want to believe the company, for now, and invest at least a little in it. Its valuation is relatively low now, and the company does seem to be growing rapidly.

Selena Maranjian has positions in SoFi Technologies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.