SoFi Technologies (NASDAQ:SOFI) shares were a big winner in 2024, particularly in the second half of the year; since its mid-August slump, the stock is up by an impressive 123%.
Don't Miss Our New Year's Offers:
- Discover the latest stocks recommended by top Wall Street analysts, all in one place with Analyst Top Stocks
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
The recent positive sentiment has been partly down to Trump’s election win, which has boosted investor optimism toward high-growth fintechs. Additionally, the improving macroeconomic conditions, lower interest rates, and SOFI’s success in scaling its operations and enhancing profitability have rendered several bearish arguments – such as worries about credit risks, capital constraints, and weak secondary market demand – less relevant.
In light of these developments, KBW analyst Tim Switzer believes it’s appropriate to shift the focus toward SoFi’s long-term potential as a mature company. However, he cautions: “Our analysis indicates the stock’s valuation has become overstretched across a wide matrix of multiples even if SOFI is successful at achieving its ambitious long-term targets, and we continue to hold some concerns related to these bear arguments.”
So, what are the concerns here?
Well, for one, SOFI’s “path to long-term guidance appears long & difficult.” The neo bank’s 2026 EPS guidance of $0.55–$0.80 relies on substantial revenue growth paired with “strong operating leverage.” However, Switzer believes achieving such revenue growth will be challenging due to various headwinds. Additionally, the analyst thinks management’s long-term ROTCE (return on tangible common equity) target of 20–30% is too ambitious, particularly in the couple of years ahead, as their 2026 guidance suggests a ROTCE closer to 13–15%. “Notably,” the analyst goes on to add, “only a handful of chartered banks can manage to sustainably generate returns even in the 20% range.”
But even if SoFi manages to hit its lofty goals, the problem of an overstretched valuation still remains, with Switzer’s analysis showing that the risk/reward is “largely skewed to the downside across the full matrix of possibilities.”
Further complicating matters is SoFi’s fair value accounting practices. To sustain its origination levels – and the associated fair value adjustments – SoFi must contend with rising amortization expenses and charge-offs associated with its expanding loan portfolio. Moreover, fair value accounting amplifies the challenges posed by lower interest rates, as coupon rates are likely to decline over time with Fed rate cuts.
Given these factors, Switzer has downgraded SoFi’s rating from Market Perform (i.e. Neutral) to Underperform (i.e. Sell). His price target of $8 implies a steep 43% downside from current levels. (To watch Switzer’s track record, click here)
The broader market view is far from unanimous. Alongside Switzer, 2 other analysts rate SOFI stock as Sell, 6 recommend a Hold (i.e. Neutral), and 5 remain bullish with Buy ratings. Overall, the consensus rating is Hold, with an average price target of $11.46, suggesting a ~23% decline from current levels. (See SOFI stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
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.
