Analyst Predicts a Steep Decline in SoFi's Stock After a Stellar Year

Having experienced a dramatic rise in the previous year, SoFi Technologies Inc. now faces a potential sharp downturn according to a recent analysis. Notably, the fintech company's stock prices more than doubled in their best year since going public in 2021. However, there's growing concern about whether they can keep up this performance.

Changing Analyst Perspectives

Analyst Mike Perito from Keefe, Bruyette & Woods has shifted his stance on SoFi, marking the stock as underperforming, which is a move from his previous neutral position. Highlighting what he views as an overly 'premium' valuation coupled with the influence of possible lower interest rates, Perito has also reduced his price target for the company's stock from $7.50 to $6.50, suggesting a significant drop from the latest closing price.

Following Perito's report, SoFi's shares saw a 10% dip in their morning trading session, reflecting the market's reaction to the new bearish outlook.

Concerns Over Interest Rates and Earnings

Decembers' signal from the Federal Reserve about likely rate cuts in 2024 sparked a rally in SoFi's stock. Still, the analyst questions the sustainability of this enthusiasm. SoFi might face decreased earnings if interest rates drop significantly due to its use of fair value accounting. Although a lower interest rate environment could decrease borrowing costs eventually, it could also force a reduction in the rates SoFi offers on personal loans due to competition and consumer expectations, negatively impacting earnings.

Additionally, he suggests that an increase in loan prepayments could pose another risk to the company's financial stability.

Valuation Comparisons and Projections

In making his case, Perito compared SoFi's valuation with that of other financial institutions, noting the market's significantly higher valuation of SoFi in contrast with its asset base. He acknowledges SoFi's high growth rates but stresses the absence of similarly premium-valued consumer banks in today's market.

The analyst points out that despite SoFi dividing opinions, and its potential journey to profitability, the risks of downside scenarios weigh more heavily given the current high valuation.

SoFi's stock is trading at a ratio almost 28 times its projected 2024 earnings, one of the steepest within the analyst's coverage, sparking a move towards a more guarded stance on the stock.

Broader Market Reactions

It's not just SoFi feeling the pressure. Other fintech stocks like Upstart Holdings and Affirm Holdings also registered declines, painting a picture of a broader adjustment within the financial technology sector.

SoFi, Stocks, Analyst