SoFi Technologies (SOFI) shares surged at the start of August after the fintech company delivered an excellent Q2 showing. But those gains have already been handed back to the market, and on a year-to-date basis, the shares still sit a depressing 59% into the red.
With the company currently in transition to deposit-based funding, Wedbush’s David Chiaverini thinks the two major concerns’ weighing on investors’ minds and impacting sentiment are: “1) the switch to held-for-investment (HFI) accounting for SOFI’s loans from its current practice of holding loans as held-for-sale (HFS) could ultimately weigh on EPS as this switch should ultimately lead to higher loan loss provisioning (LLP) in accordance with CECL (current expected credit loss), and 2) the sustainability of gain on sale income and hedging gains is being called into question given these hedges appear to be over-earning relative to origination levels.”
Chiaverini addresses both these issues. As for the former, while the analyst admits the move to HFI accounting could “weigh” on EPS, he notes that talks with the company suggest it does not plan on moving to HFI accounting “anytime soon.” There is no restriction for the timeframe when HFS loans must be sold, and so long as a company shows it plans to sell at some point in the future, it is able to “designate” loans as HFS. During its deposit funding transition, SOFi’s plan is to lengthen the timeframe in which it holds loans – from its previous practice of holding them for 3 months to 6 months. “In theory,” notes Chiaverini, “SOFI could extend this timeframe indefinitely as long as it intends to sell the loans prior to maturity.”
As for the latter issue, due to the lack of financial disclosures which will let investors “tie GAAP loan origination & sales fee income with segment gain on sale income data,” the sustainability of hedge gains and gain on sale income is a “controversial topic.”
However, Chiaverini notes that in order to protect against interest rate movements, SOFI hedges almost all of its HFS loan portfolio, and that despite not having “crystal clear” financial disclosures, this is the “main driver” to its hedge gains.
Ultimately, what does this all mean for investors? Chiaverini sticks with an Outperform (i.e., Buy) rating along with an $8 price target. Should the figure be met, investors will be sitting on returns of ~25% a year from now. (To watch Chiaverini’s track record, click here)
Overall, the Street is split down the middle on this one; based on 5 Buys and Holds, each, the stock ekes out a Moderate Buy consensus rating. At $8, the average price target is identical to Chiaverini’s objective. (See SoFi stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.