SoFi Technologies (SOFI -10.48%) has a new fan on Wall Street. Needham & Co. analyst Kyle Peterson initiated coverage of the consumer-focused digital bank on Wednesday with a buy rating.
Citing SoFi's advantages over its peers in the digital lending space, Petersen gave the bank a $10 price target that implies a roughly 31% gain for the stock over the next 12 months or so.
Why SoFi gets a high price target
SoFi has a couple of big advantages over most banking start-ups. First, it obtained a national bank charter in 2022 that allows it to fund new loans using customer deposits. Peers in the digital lending space that lack a banking charter, such as Upstart need to share a large portion of each transaction with their banking partners.
Instead of hiring another tech company to evaluate individual credit risk, SoFi employs proprietary algorithms and so far they seem to work just fine. Total delinquent loans made up 2.5% of its lending portfolio at the end of 2023 which was down from 5.2% a year earlier.
A buy for investors who can handle the risk
SoFi stock trades for 2.2 times its tangible book value. That's a high multiple for most bank stocks but most banks aren't growing this fast. The company grew its customer count by 44% last year. Revenue rose 35% in 2023 and management guided for another 20% gain in 2024.
Given SoFi's advantages in the digital lending space and its growth rate, expecting a 31% gain from this stock over the next 12 months is reasonable. That said, the stock is only appropriate for investors with a significant risk tolerance.
Its credit risk evaluation skills have produced impressive results to date but the bank hasn't had a chance to prove itself during a major economic downturn.
