If it walks like a bank and talks like a bank, should its stock be valued like a bank’s?
That’s the question on Morgan Stanley analyst Jeffrey Adelson’s mind as he assesses SoFi Technologies Inc. There is growing evidence that SoFi is becoming more and more like a bank, which prompts Adelson to reevaluate the company’s valuation.
Previously, Adelson valued SoFi based on its impressive growth, which outpaced most banks and consumer lenders. However, as SoFi takes on more banking activities and explores new initiatives, Adelson believes it should be valued in a manner similar to traditional banks.
As a result, he downgraded SoFi shares from equal weight to underweight in his latest client note. He argues that the stock’s current valuation appears inflated when considering the company’s foray into financial technology and its potential in this field.
Adelson points out that the stock price of SoFi implies a rapid increase in bank profitability, with a return on tangible common equity of over 30%. Nevertheless, he predicts a more realistic return of 15% by 2026.
Furthermore, he highlights that the stock price signifies a valuation of 2.1 times the bank’s tangible book value per share.
It is clear that the evolving nature of SoFi has sparked a reconsideration of its value as a financial institution. Investors and analysts alike are closely watching its trajectory to ascertain its true worth.
Read: Biden administration official advises student-loan borrowers to make payments during grace period
SoFi, a prominent player in the student loan space, has been the subject of much discussion and speculation. Analysts, including Adelson, have weighed in on the valuation and growth potential of the company.
Adelson, like other analysts, has expressed some reservations about SoFi’s ability to capitalize on recent policy changes related to student loans. While SoFi believes they have a $200 billion market opportunity for refinancing once the student loan moratorium ends, Adelson believes the actual market size may be closer to $100 billion.
Adelson’s valuation assumptions for SoFi suggest that the company is worth approximately 1-times its tangible book value per share. Even when factoring in “above-peer revenue growth and a path of ramping profitability,” Adelson projects a valuation of only 1.5-times for this particular aspect of the business.
Adelson also points out that SoFi’s opportunity may be further limited by President Joe Biden’s new 12-month grace period. This development, coupled with Adelson’s focus on higher-rate graduate debt rather than Parent PLUS loans or undergraduate debt, suggests a potentially narrower market for SoFi.
Despite these concerns, SoFi shares have experienced significant growth this year, with an impressive nearly 100% increase. However, recent downgrades by several analysts have tempered investor enthusiasm for the stock.
It remains to be seen how SoFi will navigate the evolving landscape of student loans and whether they can live up to their full potential in this competitive market.
Key Takeaways
- SoFi’s valuation is estimated to be around 1-times its tangible book value per share.
- Analysts, including Adelson, have expressed doubts about SoFi’s ability to benefit from recent policy changes.
- Adelson suggests that the actual market opportunity for SoFi may be half of what the company projects.
- President Joe Biden’s new 12-month grace period and SoFi’s focus on higher-rate graduate debt could further limit the company’s opportunity.
- SoFi shares have seen significant growth but have recently been downgraded by analysts.
