When is a bank a bank? The simple answer is when it looks like a bank. Case in point: SOFI Technologies (NASDAQ:SOFI). The company initially gained recognition as a fintech lender that operated outside the traditional banking sector and specialized in refinancing higher rate federal student loans.
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Over time, it expanded its range of financial services to the point where it provides a comprehensive set of banking options such as personal loans, mortgages, checking and savings accounts and investment opportunities. So now, says Morgan Stanley analyst Jeffrey Adelson, it’s time to realize that is what SoFi Technologies has become. And that demands a reassessment of its valuation.
In the past, based on extremely robust revenue growth that exceeded that of most banks/consumer lenders (almost 60% CAGR during 2020-22, 28% anticipated in 2023), Adelson has valued SOFI on a “growth-adjusted basis.”
“But,” explains the analyst, “as SOFI 1) has significantly shifted its P&L and balance sheet towards that of a bank, 2) heads towards positive earnings generation, and 3) runs close to target capital in early 2024 (as we are now assuming no loan sales until 2H24), we believe SOFI needs to be valued more like a bank, on P/TBV (price to tangible book value.”
The current price suggests the stock is trading at 2.1x ’24e TBVPS (tangible book value per share). However, this factors in the assumption the bank will hit a 30%+ ROTCE (return on average tangible common equity). “This is too optimistic,” says Adelson, who believes that by 2026e, the bank business can generate just a 15% ROTCE.
That’s not the only thing that strikes Adelson as being too optimistic. SoFi has said it sees the student refi TAM (total addressable market) post-moratorium to be around $200 billion, but Adelson thinks the opportunity is around half that – or between $70-110 billion. The Biden administration’s new 12-month grace period could also present an obstacle to refi demand. “If borrowers want to lower their monthly payment, instead of applying for a longer-term 20y loan at SOFI, they now have flexibility to make smaller payments to the government,” he explains. Adelson’s new outlook factors in refi volumes “ramp” by 75% in 2024, but that is still 10% below consensus and a third below pre-Covid levels.
Based on the above, Adelson downgraded SoFi shares from Equal Weight (i.e., Neutral) to Underweight (i.e. Sell) although the price target is bumped from $6.5 to $7. Nevertheless, the figure is still ~23% below the present share price. (To watch Adelson’s track record, click here)
Overall, SOFI’s receives a Hold consensus rating from the Street’s analysts, based on 7 Buys and Holds, each, plus 3 Sells. Most think the shares are overvalued, too; at $8.41, the average target represents ~7% downside from current levels. (See SoFi stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
