SoFi Technologies’ stock is experiencing a significant decline as analysts express concerns about the rapid rise in share prices.
In a recent report issued on Tuesday, Keefe, Bruyette & Woods analysts, led by Mike Perito, downgraded SoFi Technologies from Market Perform to Underperform. The team also adjusted their revenue and earnings estimates downwards and lowered their price target from $7.50 to $6.50.
As a result, SoFi’s shares witnessed a 7.4% drop, reaching $8.94 during premarket trading on Wednesday. Similarly, Upstart Holdings, which is a smaller competitor, experienced a 4.6% decline, while Enova International remained relatively unchanged.
Originally starting as a lender primarily focused on refinancing student debt, SoFi Technologies now operates across three segments: lending (including student, personal, and home loans), financial services, and a technology platform.
There are several factors behind the analysts’ decision to downgrade SoFi. Firstly, the company’s shares have surged by 43% since the release of its third-quarter earnings report. In comparison, the KBW Nasdaq Financial Technology Index recorded only a 30% increase during the same period. Additionally, analysts have revised their revenue and earnings estimates for SoFi below the consensus.
KBW stated, “While opinions about SOFI’s shares remain divided, we believe it is prudent to adopt a more cautious approach when a growth stock is trading at premium valuations and has the potential to decline by 15-20% based on consensus EBITDA.”
SoFi Faces Potential Earnings Headwinds as Federal Reserve Cuts Loom
Risks of Fair Value Accounting Could Impact SoFi’s Earnings
SoFi shares have experienced a surge along with other equities recently, driven by the possibility of a rate cut by the Federal Reserve later this year. However, industry analysts caution that this development could pose challenges for the company’s earnings due to its fair value accounting practices.
A Closer Look at SoFi’s Approach
SoFi, which specializes in generating loans, typically sells off these loans to other companies. As of last year’s report, the company had marked up the value of these loans on its books to include projected future resale prices, interest, and associated fees. Nevertheless, this strategy could prove risky as borrowing costs continue to decline, according to KBW analysts.
The analysts estimate that even a quarter-point reduction to SoFi’s fair-value mark for its held-for-sale loan portfolio would have a direct impact on revenue, resulting in a $50 million downturn or a decrease of five cents in earnings per share.
Every Cent Counts
Though it may seem insignificant, even a few cents can play a crucial role. SoFi management aims to report its first profit in accordance with generally accepted accounting principles for the fourth fiscal quarter. Analysts, based on FactSet, project earnings of just one cent per share during this period.
Investors can expect to discover where the numbers will ultimately land in the near future. The company released its fourth fiscal quarter results in late January last year.