Shares of SoFi Technologies (NASDAQ:SOFI) dropped 4% in pre-open trading Thursday following a downgrade at Morgan Stanley, which said the stock is incorrectly pricing in too much bank profitability.
MS analysts cut shares from Equal-weight to Underweight, while lifting their price target to $7 from $6.50. The new price target suggests about 24% downside to Wednesday's closing price.
They said their previous assessment of SOFI's value was based on its growth potential, which outperformed most banks and consumer lenders. However, considering SOFI's evolving nature resembling a bank, they now believe it should be valued similarly to a bank. Presently, the share price suggests that the bank is trading at 2.1 times the projected tangible book value per share (TBVPS) for 2024. This valuation implies an expectation of the bank achieving a return on tangible common equity (ROTCE) of over 30% in the near future, which they find overly optimistic. Their estimation suggests that the bank business can only generate an ROTCE of 15% by 2026.
"Under a classic P/TBV vs. ROTCE framework using our consumer finance coverage, this would be enough to justify only ~1x P/ TBV," the analyst commented. "However we are crediting SOFI with above-peer revenue growth and a path of ramping profitability, with an eye toward eventually reaching a 20%+ ROTCE, we estimate the bank should be valued at 1.5x P/TBV, driving our $5.50/share for the bank in the SOTP. Layering on value of Tech Platform at 3x P/Sales, we get to our new SOFI price target of $7."
Further, the analysts see the opportunity from the student loan restart as smaller than expected. They hold the belief that the total addressable market (TAM) for student loan refinancing following the moratorium is approximately half of SOFI's projected $200 billion, ranging from $70B to $110B.
They also see risk to revenue growth from rising credit losses, NIM pressure, and said "pull to par" on their personal loan book as previously recognized up-front gain on sale income may slow fee income.