In a recent report, analysts at Morgan Stanley argue that SoFi Technologies is starting to resemble a bank and therefore should be valued accordingly. They have downgraded the stock to Underweight from Equal Weight and have raised the price target to $7 from $6.50.
SoFi’s shares were down 0.4% to $9.16 during midday trading, although they have almost doubled in value this year.
The analysts believe that the current share price implies a valuation of 2.1x the estimated 2024 tangible book value per share. This valuation reflects an expectation that SoFi’s bank business, including its lending and financial services segments, will achieve a ROTCE of over 30%. However, the team predicts that SoFi’s bank business will reach a more realistic 15% ROTCE by 2026. This would warrant a valuation of approximately 1x price to book value.
Revenue Growth and Profitability
Despite projecting a lower ROTCE, the analysts recognize that SoFi is outperforming its peers in terms of revenue growth and profitability trajectory. They anticipate that SoFi will eventually achieve more than 20% ROTCE. This would still only value the bank at around 1.5x price to book value, resulting in a revised price target of $5.50.
Tech Platform Value
When factoring in the value of SoFi’s tech platform, the analysts arrive at a new price target for the company of $7.
The analysts also suggest that the refinancing opportunity resulting from the resumption of student loan repayments may be smaller than what SoFi expects. This echoes similar concerns raised by another analyst last month.
According to FactSet, of the analysts covering SoFi, 33% rate it as Buy, 56% as Neutral, and 11% as Sell.