Up 124% In 2023, SoFi Stock Is Caught Between Bulls And Bears

As a shareholder of San Francisco-based fintech, SoFi Technologies, I am disappointed its stock trades 57% below the high it reached in June 2021 – the day it went public by merging with a Special Purpose Acquisition Company.

Yet the news is not all bad. Its shares have done well in 2023 – up 124% through August 2. What’s more, SoFi reported expectations-beating second quarter results and boosted its forecast.

With 14.4% of SoFi shares sold short, according to the Wall Street Journal, the battle rages on between the bears, – who view SoFi stock as overvalued, and bulls like me, who cite its ability to beat growth expectations, its path to profitability, its declining expenses, and its improving credit quality.

SoFi’s Second Quarter Financial Report

In the latest company report, released on July 31, SoFi beat expectations and raised guidance when it reported second quarter results.

SoFi operates in three business segments: lending; financial services, like services for checking, and savings, investment, and credit cards; and technology platform, a digital payments service.

Here are SoFi’s key Q2 numbers:

• Revenue: $498 million. This was 37% more than the year before and $22 million higher than analyst expectations, according to Reuters. SoFi’s growth rate exceeds the 2022 to 2027 Statista fintech industry forecast of 19.4% compound annual growth.
• Personal-loan originations: $3.7 billion. This is a 51% increase from the year before and the loans sport a weighted average coupon rate of 13.6%, according to the Wall Street Journal.
• Net interest income: $291.1 million. This more than doubled the previous year’s figure and beat expectations by $30 million, noted Reuters.
• Net interest margin: 5.74% – exceeds its peer-group average, thanks to the spread between its double-digit loan interest rates and its consumer deposits, which pay interest at rates from 0.5% to 4.4%, the Journal reported.
• Net loss: $47.5 million. SoFi said it expects to report a profit in the fourth quarter of 2023, Reuters wrote.
• Total deposits: $12.7 billion – up 26% – more than a billion dollars more than what analysts expected, according to Visible Alpha.
• Total customers: more than 6.2 million – up 44%, according to the Journal.

SoFi also increased its outlook for the third quarter by 22%. According to MarketWatch, SoFi raised its adjusted earnings before interest, taxes, depreciation and amortization to a range between $333 million to $343 million. The midpoint of this range – $338 million – is 21.6% above $278 million – the midpoint of its earlier adjusted EBITDA forecast.

SoFi’s Bear Case

The case against SoFi’s stock hinges on two arguments:

• Its shares are overvalued. Analysts see SoFi’s stock price as excessive because they do not think it can achieve its profitability forecasts. Specifically, at 30 times its EBIDTA forecast, Keefe, Bruyette & Woods analyst Michael Perito wrote SoFi’s valuation “has overshot the fundamental earnings outlook. ” He expects the fintech’s 2023 profitability to be only “modest at best.” He views growth as likely to moderate which would crimp SoFi’s capital consumption, MarketWatch reported. In mid-July, Morgan Stanley
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  wrote SoFi should trade at one times price-to-book rather than its current 2.1 times 2024 tangible book value per share. Morgan Stanley noted SoFi’s current valuation assumes a 20% return on average tangible common equity – whereas the analyst sees 15% as a more realistic estimate, according to Barron’s.
• Its growth is slowing. Moreover, Morgan Stanley doubts SoFi can sustain its high growth rate – on which SoFi’s stock price depends. Jeffrey Adelson of Morgan Stanley set a $7 price target for SoFi, arguing its “valuation looks expensive with execution risks into 2024 as growth slows [and] rates stay higher for longer,” MarketWatch noted.

SoFi’s Bull Case

Bullish views regarding SoFi’s future hinge on three observations:

• SoFi should not be compared to banks because it is gaining market share with strategies banks cannot replicate. Andrew Jeffrey of Truist Securities wrote in a note to clients, SoFi is winning new depositors quickly and speeding up loan decision-making in ways legacy banks do not currently and may not be able to copy in the future.
• Clear path to profitability. Keefe, Bruyette & Woods analyst Michael Perito wrote, “While the stock is near technical highs, the raised guidance and stronger margins (particularly in the financial services segment) present a clearer path towards profitability” by the end of the year.
• Lower expense growth. Morningstar
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  boosted its target price by $0.50 for SoFi to $14.50, noting, “roughly half of that increase reflects the time value of money since our last update, while the remainder is due to lower near-term expense growth projections, as we now expect SoFi to be profitable during 2024.”

Where Will SoFi Stock Go Next?

SoFi’s stock looks slightly overvalued based on a 12-month price target of $9.66 from 18 Wall Street analysts, according to TipRanks.

Mizuho analyst, Dan Dolev wrote SoFi’s FSPL will encourage “user engagement, nurturing a flywheel effect of more users taking advantage of SoFi’s multiple services driving additional growth.” He expects this flywheel to create ‘operating leverage’ as revenues grow — ultimately “shrinking losses and…delivering profits.”

SoFi’s stock price depends on whether it exceeds expectations. On the other hand, if it falls short of the expectations it raised July 31, the SoFi bears will prevail. Only time will tell.

Disclosure: I own shares in SoFi Technologies – starting as an angel investor in 2014.