Timing is an essential component to success, and that is no different in the stock market. A company can have much to offer but if its value proposition does not chime with the times, the stock is bound to lose. And unfortunately, this is the case with SoFi Technologies (NASAQ:SOFI).
At least that is the opinion of J.P. Morgan’s Reginald Smith. “We like SOFI’s product breadth and go-to-market strategy (to be the full-service bank for highly educated, digitally inclined consumers) and think the company will ultimately be a winner in the neo/digital bank space, garnering American Express-esque brand cachet over time,” the analyst explained. “That said, SoFi is caught in the vortex of a once-in-a-generation Fed tightening cycle that could precipitate write-downs to its $11bn loan portfolio, which isn’t discussed/appreciated by the Street.”
Additionally, due to SoFi’s increasing unsecured personal loan exposure and short operating history, Smith expects the shares will “continue to be plagued by skepticism weighing on consumer credit names.”
In recent quarters, given that loan portfolio growth provides the most rapid way to “scale” and increase profits, SoFi has moved toward to a “more balance sheet intensive model.” However, lending-based firms have historically been assigned “lower multiples” by the market, especially during periods of overall downturns, which Smith thinks has been affecting the shares’ performance – the stock shed 71% of its value last year, despite the company making “positive guidance revisions” over the course of the year.
Over time, Smith sees a “potential for multiple expansion.” Before that happens, however, an increased mix of recurring fee-based revenues or better consumer credit trends and sentiment will be called for, and here Smith is of the view that before they improve, trends will actually “get worse.”
Additionally, Smith thinks deep-value investors will find it hard to evaluate the downside risk because SoFi uses fair value accounting and “doesn’t take reserves against its $11 billion held-for-sale loan portfolio.”
So, down to business, what does this all mean for investors? Smith initiated coverage of SOFI shares with a Neutral rating along with a price target of $6. There’s room for modest growth of ~6% from current levels. (To watch Smith’s track record, click here)
4 other analysts join Smith on the sidelines, but with an additional 7 Buys, the stock claims a Moderate Buy consensus rating. Shares are expected to change hands for ~25% premium a year from now, given the average target clocks in at $7.08. (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.
