SoFi Technologies (SOFI) is a lending technology platform and consumer financial stock that has significantly outperformed the broader financial sector over the past 12 months. However, despite the impressive growth outlook, I’m pessimistic about this California company. The stock’s valuation is very high, and the high price paid for the expected growth creates a lot of execution risk. It also benefited from a strong macroeconomic environment and sentiment that could change.
Front and center in my bear case is SoFi Technologies’ high valuation. The company’s price-to-earnings ratios are alarmingly high compared to sector averages, suggesting conditions may be overstated. Currently, its non-GAAP P/E (TTM) ratio is 114.4x which is 733.4% higher than the industry average of 13.7x. Even more worrying is its forward P/E ratio of 134.6x, which is 890% higher than the sector average.
These numbers suggest that investors are paying a significant premium for SoFi’s potential future earnings, creating significant execution risk. GAAP P/E ratios tell a similar story. The TTM P/E of 132.5x and Forward P/E of 119.5x are well above sector averages. These assessments indicate very high growth expectations that may be difficult to achieve. Looking at the estimated P/E ratios for the coming years, we see a strong decline from 119.4x in 2024 to 25.3x in 2027.
Earnings growth is expected to average 60% over these years, which is impressive but inferring a price-to-earnings-to-growth (PEG) ratio of 1.99. This is well above the sector average of 1.45. Furthermore, SoFi doesn’t pay a dividend, unlike many of its peers in the financial sector, which makes its price-to-earnings ratio look more expensive. Such lofty valuations leave little room for error and make SoFi vulnerable to market corrections if the company fails to meet such lofty growth expectations.
I’m also bearish because I believe SoFi’s valuation has evolved due to a high-risk environment, which has contributed to the 121% rally over the past 12 months. The US market had one of the strongest years in living memory, with the re-election of Donald Trump providing additional support. The stock’s success has been driven by record revenue and member growth, due in part to a higher interest rate environment and the resumption of student loan payments.
These factors have allowed SoFi to triple its revenue and accelerate its growth trajectory. However, this success also makes SoFi vulnerable to changing macroeconomic conditions and market sentiment. While the current expectation of interest rate cuts in 2025 supports SoFi’s growth outlook, any deviation from this path could impact the company’s performance. Furthermore, the quality of SoFi’s loan portfolio is showing signs of deteriorating, with a significant increase in loans delinquent by 90 days or more.
In the third quarter of 2023, the company also saw a five-fold increase in loan fees compared to the previous year. This tends to indicate increasing financial pressures among consumers. This trend, coupled with record-high consumer debt levels, suggests that SoFi’s current growth and profitability may face headwinds. With such high growth expectations, the stock may also be vulnerable to broad shifts in investor sentiment.
Although I’m bearish on SoFi Technologies, I’m willing to accept that the stock could surprise me. This is evidenced by positive earnings revisions and strong growth outlook. For the upcoming quarter, 7 out of 10 analysts have revised their EPS estimates upward in the last 90 days, indicating optimism about the company’s near-term performance.
Looking ahead, SoFi’s earnings growth outlook is impressive. Analysts expect earnings per share to double from $0.13 in 2024 to $0.28 in 2025, representing a 111.7% increase year over year. This growth trajectory is expected to continue, with EPS forecasts reaching $0.79 by 2028, implying a CAGR of more than 50% from 2024 to 2028.
However, the aforementioned high valuation leaves little room for error and creates significant execution risk for SoFi. A company must consistently meet or exceed high growth expectations to justify its current stock price. Mistakes in execution are likely to be punished by the market. That’s why I simply can’t invest.
At TipRanks, SOFI comes in as a Hold based on five Buy, seven Hold, and two Sell ratings assigned by analysts in the past three months. The average price target for SOFI stock is $10.29, which implies a downside risk of approximately 34.75%.
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I’m bearish on SoFi Technologies despite the great growth outlook and very strong momentum. The stock’s high valuation leaves little room for error and creates significant execution risk, which I believe is supported by the average stock price target.
Furthermore, SoFi’s success has been driven in part by a favorable macroeconomic environment and strong market sentiment, which could change. Additionally, signs of deteriorating loan portfolio and record-high consumer debt levels raise concerns about the sustainability of SoFi’s current growth trajectory. While the company could surprise me with upside, the potential rewards don’t justify the high risks.
Disclosure