SoFi Technologies Inc (SOFI) is scheduled to report its Q4 earnings on January 30. Investors will be closely watching how SoFi’s revenue gets impacted in the current recessionary environment. But, in addition to tracking the headline financial figure, investors must also pay close attention to SoFi’s liquidity ratios, its member count, product sales, segment financials, and management’s outlook for Q1. These items will provide more color on the company’s operational positioning and are likely to influence where its shares will head next in the coming weeks.
Despite some fears, SOFI has continued to grow quite rapidly. If we extrapolate this growth with a slowdown for the next 5-6 years, then SoFi can be valued as a traditional bank with an upside potential of about 30-50%. If we separate its Technology Platform segment, then the upside potential of the “fair value” can be more than 50%, with a small premium to the implied price-to-sales ratio of the industry average.
There are a number of obvious risks to consider when looking at the potential of SoFi Technologies. First, a non-classical approach to cash flow calculation is used - it is impossible to value a bank using FCFF, so ROE and asset growth are primarily looked at. If the share of common equity as a percentage of total assets falls faster than expected and ROE stops growing at around 10%, the end result will not show the undervaluation currently being considered.
Second, the assessment of the Technology Platform segment is also quite subjective, as the sample companies used for comparison and the P/ ratio premium set are personal choices. There may be bias in this assessment.
The third point concerns the risk of a recession and, as a result, sustained inflation in the valuations of high-growth companies. Strong multiple contraction and concerns about the sustainability of the company’s business model led SoFi Technologies, along with other high-growth, unprofitable companies, to lose more than 77% of its market capitalization on the stock market since November 2021 (~80% from all-time highs). This poor price action may continue in the future if (SPY) bounces off its new resistance level and starts testing a new low shortly - by analogy with 2008.
Despite all the risks, however, SoFi Technologies seems to be an interesting growth company for a long-term investment. Even with a natural slowdown in current growth rates - which we see against the backdrop of an already turbulent global economy - SoFi’s intrinsic value is already higher than what one has to pay for it.
This site references only our opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. Disclaimer: We own some of the securities mentioned and may open more positions within 24 hours.