Title: SoFi Investors Urged to Sell as Stock Surges, Analyst Downgrades Rating
Subtitle: Financial technology company’s soaring stock raises concerns over valuation
Date: [Insert Date]
In a turn of events for SoFi, a leading financial technology company, analysts are advising investors to sell their holdings after the stock has more than doubled in just a few months. KBW analyst Michael Perito downgraded the stock to underperform from market perform, citing concerns over its valuation and the potential impact on earnings.
Perito simultaneously increased his price target for SoFi shares by $2 to $7.50. However, this new price target still implies a potential 34.5% decline from Monday’s closing price. Perito emphasized that the company’s valuation has surpassed its fundamental earnings outlook.
The downgrade comes after the stock experienced a significant rally of 19.9% on Monday, following the release of SoFi’s second-quarter earnings. The company posted a loss of 6 cents per share, slightly better than analysts’ expectations of a 7 cents per share loss.
Despite raising its expectations for full-year earnings, SoFi’s shares are currently trading at over 30-times the high end of its EBITDA target range for this year. Perito believes this valuation is one of the highest among financial companies covered by KBW and concludes that it’s “difficult to fundamentally justify.”
While SoFi’s compound annual growth rate can support a premium-level valuation between 2021 and 2024, Perito predicts that revenue will fall short of market expectations, posing challenges for the company. However, he does acknowledge the potential for several years of “industry-leading revenue growth” due to its product work in the financial services sector, as well as a potential boost from a recovery in loan originations.
Although there may not currently be any immediate catalysts for a decline in the stock, Perito warns that the potential risks associated with earnings could outweigh the rewards. These risks include pressured loan fair values, higher hedging gains, or the need for an external infusion of capital.
Perito concludes his note by stating that investors face a unique set of risks in such a high-growth story and describes the upside/downside as negatively biased following the recent outperformance in the second quarter of 2023.
Meanwhile, the analyst also adjusted his bottom-line expectations for SoFi, projecting a narrower loss of 3 cents per share for 2024 compared to the previously anticipated 5 cents per share loss. He further suggests that the company could potentially break even in earnings by the second quarter of next year, with the possibility of turning losses into profits in the latter half of the year.
As the market digests this downgrade, SoFi investors are left to weigh the potential risks and rewards associated with holding onto their shares. Only time will tell whether the stock can sustain its impressive performance or if it succumbs to the concerns raised by KBW’s analysts.
Note: The content of this article is based on the analysis and opinions of KBW analyst Michael Perito.