Selling SoFi Technologies: A Closer Look
According to Morgan Stanley analyst Jeffrey Adelson, SoFi Technologies is worth selling as it is starting to resemble a full-fledged bank. Adelson downgraded the financial stock to underweight while adjusting his price target to $7, a 50 cent increase. However, this raised price target suggests that shares could potentially drop by 23.9% in the next year.
The Shift Towards a Bank-Like Structure
In the past, SoFi was valued based on its exceptional growth, surpassing most banks and consumer lenders. However, Adelson believes that as SoFi begins to resemble a bank more closely, it should be valued accordingly. This shift in perception has prompted the downgrade.
Potential Downsides and Upsides
Although the stock fell nearly 5% in premarket trading, it has experienced significant growth throughout the year. Adelson highlights that part of the valuation for SoFi is based on the expectation of achieving a 30% return on average tangible common equity. However, he finds this expectation overly optimistic and predicts a 15% return by the end of 2026. Adelson also notes a skewed risk-reward balance, with a potential 70% downside and a 30% upside.
Challenges and Opportunities
SoFi faces unique challenges as a bank. Unlike traditional banks, net charge-offs can impact its revenue. Additionally, net interest margin and fee income may face pressure this year. Adelson also points out that the restart of student loan payments may have a smaller impact than anticipated. He expects the total addressable market after the moratorium ends to be around $70 billion to $110 billion, which is significantly lower than the company’s forecast of $200 billion.
Forecasts and Potential Catalysts
Adelson’s volume forecasts for SoFi by 2024 are below Wall Street consensus and lower than pre-pandemic expectations. However, he acknowledges that the stock could be positively influenced by factors such as a rise in mortgages, sales rebound, technological wins, and a significant drop in interest rates.
