SoFi's stock could follow record year with a sharp plunge, this new bear warns

By Emily Bary

Stock sells off sharply after KBW moves to bearish stance

SoFi Technologies Inc. shares more than doubled last year in what was their best annual performance since the financial-technology company went public in 2021. But one analyst worries that momentum won't carry into 2024.

Keefe, Bruyette & Woods' Mike Perito downgraded SoFi shares (SOFI) to underperform from market perform, warning of a "premium" valuation and potential pressure stemming from lower interest rates. He cut his price target to $6.50 from $7.50, with the new target implying 33% downside relative to Tuesday's close.

Shares were off 10% in morning trading Wednesday.

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Perito noted that SoFi's stock got caught up in the relief rally following the Federal Reserve's mid-December signal of possible rate cuts in 2024, but he questioned whether that enthusiasm is warranted.

SoFi "is actually at risk for down-earnings at least initially if rates come down materially due to [its] fair value accounting," he wrote. "Longer term, the bank's cost of capital will reduce, and the ability to lower its deposit costs should accelerate in a lower-rate environment, but SOFI may also be forced by market forces to lower its coupon rate which could directly impact earnings negatively."

In his view, "it would be difficult for SOFI to sustain personal loan originations near current levels without reducing its coupon rate in a scenario where the Fed cuts rate meaningfully given the competitive dynamics vs. credit-card companies, re-entrance of other competitors to the market, plus consumer expectations for lower debt yields." An acceleration in prepayment speeds represents another risk.

When Perito published his note to clients Tuesday afternoon, he assumed a $1.8 billion valuation for SoFi's technology business and said that the market was valuing the bank, which has about $30 billion in assets, at about $7.8 billion. For comparison, he pointed out that Ally Financial Inc. was valued near $11 billion, despite having about $200 billion in assets.

"Growth rates are certainly different, although we fail to find an example of a premium-multiple consumer bank in the market today," Perito added.

He wrote that SoFi's stock remains "polarizing," and while the company could be on the road to achieving and maintaining profitability, "there are more downside scenarios to this outcome than upside, which at a premium valuation shifts us to a more cautious stance."

The stock was trading at almost 28 times 2024 estimates for earnings before interest, taxes, depreciation and amortization as of the publication of his report, seemingly "one of the highest valuations for any balance sheet financial in the KBW coverage universe."

Other financial-technology names were dropping as well Wednesday, with Upstart Holdings Inc.'s stock (UPST) down more than 4% and Affirm Holdings Inc.'s stock (AFRM) off 2.8%.

Read: Verizon's stock finally had a positive year. This bull sees bigger gains in 2024.

-Emily Bary

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01-03-24 1015ET

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