Is SoFi Technologies Fairly Valued?
Checking in on SoFi Technologies (SOFI), Weekly Activity, & Portfolio Update.
This week, following the release of our CPI data, I seized the opportunity to deploy capital as some of my preferred stocks experienced a downturn in response to the news. Notably, SoFi Technologies (SOFI) witnessed a significant drop in its stock price last week, a movement I recently analyzed in detail. To gain a comprehensive understanding, I recommend reviewing my previous article, which will help in connecting the dots regarding SoFi's current valuation landscape. Now, let's dive into a deeper analysis!
What a Bargain?
The start of 2024 brought a challenging phase for SOFI, with its shares tumbling over 16% in the past week. This downturn was primarily triggered by a downgrade from Keefe, Bruyette & Woods (KBW) analyst Mike Perito. Perito shifted SOFI's rating to underperform from market perform, reducing the price target from $7.50 to $6.50. This shift came despite SOFI's stock having doubled the previous year, buoyed by a 40% surge post-impressive Q3 results. It's worth noting, however, that Wall Street's cautious approach isn't entirely unexpected given this rapid ascent. Nonetheless, I see this dip as an opportune moment to augment my holdings in SOFI, especially considering I disagree with the bearish stance of the analyst.
SOFI ended the week with its current price around $7.80/share. Despite this, the company boasts a market cap of $8B, with a 60.34% gross margin and significant trading volumes. KBW's downgrade of SOFI hinges on the view that premium-valued growth stocks with potential downside risks to consensus EBITDA warrant caution. While I generally don't shy away from investing in premium-priced stocks, often justified by their robust underlying businesses, it's crucial to dive deeper into KBW's concern regarding interest rates.
Perito from KBW is apprehensive about the impact of potential central bank federal funds rate cuts on SOFI's earnings and revenue, citing the company's fair value accounting methods. A key aspect of SOFI's operations includes originating loans and either retaining them on the balance sheet or securitizing and reselling them. These loans are marked up to reflect various factors, including anticipated future resale prices and interest rates. Thus, any reduction in borrowing costs could potentially lower the mark-to-market value of these loans. For instance, KBW estimates that each quarter-point reduction in SOFI's held-for-sale loan portfolio's fair-market value could translate to a $50M revenue headwind, or about five cents per share in earnings. This is significant considering SOFI ended the previous quarter with nearly $21B in loans held for sale.
I highlighted a while ago, on how the Fed's rate hikes had accelerated SOFI's growth, with CEO Anthony Noto confident about SOFI's competitive positioning. However, KBW's downgrade seems to overlook the company’s preparedness for potential mark-to-market losses in its loan portfolio and the resilience of its other business segments. It’s noteworthy that for the first time, all three of their core segments reported positive contribution profit last quarter. Given the management's expertise and their history of adeptly navigating market changes, I'm skeptical about their being blindsided by the effects of falling rates.
As of October 2023, they had impressively sold over $14B and securitized over $13B in personal loan collateral. This was further bolstered by a new $375M securitization agreement with BlackRock (BLK), and a $100M tranche of loans sold at a favorable execution level to an anonymous partner, alongside a $2B forward flow agreement for additional loan sales. The company’s capacity to flexibly maximize loan-related ROE is another strength. With $8.4B in warehouse finance facility capacity and $3B in equity capital, coupled with a 23% sequential growth in bank deposits, the company is well-positioned to adapt its strategies in response to fluctuating interest rates.
So, looking ahead, the proactive management approach, particularly in light of the impending Federal Reserve rate cuts, should position the company favorably. The upcoming release of their fourth-quarter 2023 results is likely to offer further clarity and could potentially alleviate Wall Street's concerns, potentially making the current stock price dip a temporary setback.
Weekly Activity (Jan 8th-12th)
2 shares of VOO (S&P 500)
25 shares of Boston Omaha (BOC)
50 shares of SoFi Technologies (SOFI)