It has been a difficult year for SoFi (SOFI -0.56%) shareholders, with shares of the one-stop-shop financial services company down a whopping 70% so far this year.
Like most tech and fintech stocks, the company has struggled in the face of rising interest rates, volatile market conditions, and a bleak economic outlook including the potential for a recession sometime in 2023 or 2024. SoFi now trades at about $4.45 per share and has a $4.2 billion market cap.
Can the company recover next year and get back up to $10 per share, a level it traded above all throughout 2021? Let's take a look.
Evolving the business model
SoFi has had an eventful year in 2022 and not just because the shares are down. The company has also taken several big steps, including completing its purchase of Golden Pacific Bancorp and its accompanying bank charter at the very start of this year.
This bank charter has allowed SoFi to gather and hold deposits and originate loans instead of outsourcing these functions to third-party banks. Additionally, the bank charter has set up a better framework for SoFi to hold loans on its balance sheet for longer, collecting more recurring monthly interest payments before selling the loans to investors.
Image source: Getty Images.
SoFi is currently using an interesting accounting treatment in which it holds loans for six months and then sells them to investors. This allows the company to avoid setting aside large amounts of reserves for loan losses, which would cut into earnings because it intends to sell the loans.
But the capital markets have been struggling, with investors facing a higher cost of capital and also having concerns about loan losses in the event of a recession. While SoFi's loan book is full of high-quality borrowers, the uncertainty in the environment does increase the risk that the bank won't be able to offload the loans to investors for a profit, although conditions could improve in 2023.
SoFi also completed another large acquisition earlier this year, purchasing the multiproduct, cloud-core processing company Technisys. Core processing systems are a primary part of a bank's back-end system, powering many daily banking transactions and functions. The industry is at a time of transition where it is moving from old core processing systems to ones that operate in the cloud. Technisys will help power SoFi's tech division, which generated close to $85 million of revenue in the third quarter.
Regulatory issues
But the bank has also run into several problems this year, including with the student loan moratorium, which has now been extended until June 30, 2023. Student loan refinancing used to be SoFi's largest business in its lending segment, which is by far the company's most profitable division.
In the first quarter of 2020 before the worst of the pandemic, SoFi's student lending arm originated more than $2 billion of loans. Since then, originations have only exceeded $1 billion twice. I suspect the recent extension of the moratorium will hurt SoFi's 2023 earnings and revenue.
Recently, SoFi also received a letter from the Senate Banking Committee, inquiring into SoFi's crypto activities in the wake of the FTX debacle. Lawmakers have also sent a letter to banking regulators wondering if SoFi has violated its terms with the Federal Reserve following its transition into a bank holding company.
The Fed noted in its approval of the bank acquisition that it found some of SoFi's crypto activities to not be "permissible." The Fed told SoFi to divest its crypto division or get into compliance with the law within two years, and also not to expand its crypto activities during this time. It will certainly be interesting to see how this plays out.
Can SoFi hit $10?
Currently, SoFi is projected to generate as much as $1.52 billion in revenue in 2022 and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of as much as $120 million. Based on its market cap of $4.2 billion market cap, SoFi trades at about 2.7 times projected 2022 revenue and close to 34 times adjusted EBITDA.
Analysts on average are projecting SoFi to generate about $2 billion of revenue next year. So, if SoFi were to reach $10 per share the company would have around a $9.3 billion market cap, meaning it would trade at almost 5 times revenue -- much richer than today. I also don't think SoFi is going to be able to increase adjusted EBITDA enough to make it look any cheaper on that metric, especially if it trades at $10 per share.
Considering the fintech company is still far from profitability and revenue growth is expected to slow this year, I don't think SoFi will reach $10 per share, although I could see it appreciating if the macro environment gets more favorable.
