SoFi Downgraded: Here’s How To Still Make Money

Key Points

• A 160% rally since May made it difficult for this week’s earnings to be a knockout. 
• While good, they weren’t great, and shares were downgraded as a result. 
• The longer-term opportunity remains strong and any weakness from here is a buying opportunity.

Investors had been expecting big things from SoFi Technologies Inc’s NASDAQ: SOFI earnings this week, especially after its shares rallied 160% since May. However, as seen with the 15% drop from Monday’s high before the numbers were released, they were disappointed, and to make matters worse, the team over at KBW just downgraded them. 

For a stock that was starting to get back on its feet, it’s been a tough week. Remember, this is the same SoFi that was trading close to $30 in 2021 and the same one that only got back above $5 two months ago.

Even though the online bank was able to show 37% year-on-year growth in its revenues for Q2 while also boosting its forward guidance, investors were left feeling Monday’s numbers didn’t justify the recent run-up in the stock. 

Valuation Concerns

It was a theme echoed by analyst Michael Perito at KBW, who yesterday cut his rating on SoFi from Market Perform to Underperform. In a note to clients, Perito and his team expressed their concern over what they called one of the highest valuations for any balance sheet of the stocks KBW covers.

Especially now, in light of the most up-to-date numbers, which admittedly were good but not great, they feel it will be challenging for SoFi to go on sustaining such a valuation. 

Of note here is the fact that Perito also feels short interest on the stock has likely normalized. This suggests that KBW are attributing much of the recent rally to SoFi bears exiting their short positions, a move that means they must buy the stock and, in doing so, drive up the price.

Looking ahead, Perito sees profitability being “modest at best” heading into 2024, with the company’s return on equity languishing in the single digits. For context, the industry median for this metric is about 11%. 

So for those of us on the sidelines, how should we now be thinking about SoFi, a fintech that has, at various times in recent years, been a must-own stock? Well, for starters, it’s probably fair to expect some consolidation over the next few weeks as the numbers are fully digested in tandem with the stock’s reaction.

But on the whole, we at MarketBeat see any continued fall from the current price as only further broadening a great long-term entry opportunity. 

Long Term Potential

Consider this; this quarterly revenue SoFi reported on Monday was, at $104 million, more than 1.5x that of June 2021’s $65 million. Yet their shares are trading today at a 60% discount to their price back then. Of course, the broader landscape has changed in the meantime, and there’s a lot more to a stock’s price than the quarterly revenue it turns over, but it’s a marked gap nonetheless.

Monday’s revenue number was the company’s third highest ever, while its revenue before loan losses figure was an actual record. 

So too, was SoFi’s net interest income and revenue per share while, perhaps most importantly, its EPS was a single cent away from joining the club. The company has never been closer to profitability, and Monday’s report will support the bull’s argument that that day isn’t very far away at all. 

SoFi investors have to contend with the fact that the recent run-up got a little overheated, and to be fair, this is evident from the stock’s relative strength index (RSI) alone. A reading of anything above 70, in a range of 0-100, points to a stock being overbought. SoFi’s RSI was almost 90 in June and was at 75 on Monday morning.

It’s perhaps no bad thing that there’s some downward pressure to release the steam, especially for those of us who buy into the long-term potential. Look for the bears to run out of steam around the $9 mark, with a fresh run back above $10 and beyond likely starting shortly after that.