The bear case for SoFi Technologies (NASDAQ:SOFI) has long been based upon valuation-related concerns. Using traditional valuation metrics, SOFI stock appears pricey to more value-conscious investors.
In their view, SoFi seems more like its “old school” banking rivals than it does to other more tech-driven companies in the fintech space.
Earlier this month, a sell-side analyst downgraded shares, citing these sorts of concerns.
This downgrade had just a temporary impact on the stock’s performance. Still, you may be worried the market could swing towards this more bearish view.
However, while on the surface it does appear SoFi is a bank stock trading like a tech stock, additional factors point to it sustaining its current valuation.
From there, shares are well-positioned to climb higher, depending on to what degree CEO Anthony Noto’s grand vision for the company plays out.
The Latest Valuation Case Against SOFI Stock
On July 13, Morgan Stanley’s Jeffrey Adelson downgraded SoFi Technologies stock to “underweight” (equivalent to a “sell” rating). As Larry Ramer wrote that same day, and as I hinted above, the analyst’s argument was based mostly on valuation.
Per Adelson, SOFI stock “looks increasingly like a bank,” and therefore “needs to be valued more like a bank.”
Given that the neobank has yet to reached profitability, instead of relying on the price-to-earnings metric to make his point, Adelson presented a more complex valuation-based bear case.
In his view, the current valuation of SoFi (more than double its tangible book value) implies a much faster, more substantial jump in profitability for this digital-first financial services company than is likely.
The analyst believes this gives the stock downside risk that far outweighs upside potential.
Again, the market only briefly took Adelson’s bear case to heart, and has reverted back to bullishness for the stock in more recent trading days.
You may still be concerned that investors could still start to believe in this view, or that SoFi will start to deliver underwhelming growth, but I suggest considering all factors before jumping to that conclusion.
A Growth-Focused Counterargument
It’s not as if the aforementioned bear case for SOFI stock completely ignores the underlying growth story with this company. Adelson acknowledges SoFi is growing. He just thinks it won’t grow as fast as the market currently expects.
For instance, in areas like student loan refinancing. While the end of the student loan repayment moratorium will provide a boost, the analyst believes said boost won’t be as massive as expected.
However, it may be short-sighted to believe SoFi has much more limited room to run in terms of growth.
It is interesting that SoFi CEO Anthony Noto argued his bank could one day become one of America’s ten largest financial firms. Sure, right now, this may sound overly ambitious.
As of March 31, 2023, SoFi had $10 billion in interest-bearing deposits. Top-ten banks have hundreds of billions, if not trillions, in total deposits.
That said, growing its deposit base at a rapid clip, and targeting “high earners not well-served” (as Noto put it), I wouldn’t discount SoFi’s potential to grab significant market share away from venerable-but-stodgy “old school” banks.
Bottom Line: Keep it on Your Watchlist
If SoFi can maintain double-digit revenue growth, as well as deliver a swing to profitability that comes in at the high end of forecasts, a move to prices north of $10 per share is within reach.
With shares trading for just $10 per share today, I’ll admit that may sound like minimal upside.
However, besides the prospect of shares moving even higher on a longer timeframe, as Noto’s strategy catapults SoFi into the banking top ten, the opportunity to snap up a position at a lower price could soon emerge.
On July 31, SoFi will release its latest quarterly results. Shares have been on a tear since the student loan news. Investors may take profit after earnings, causing a pullback.
As its long-term prospects remain promising, keep SOFI stock on your watchlist, as a possible buy on weakness.
SOFI stock earns a B rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.