Shares of the member-centric consumer bank SoFi Technologies (SOFI 0.06%) have been soaring. The stock shot up by 148% during the five months between June 30 and Dec. 1, 2024.
SoFi stock defied gravity for months but started falling recently. Investment-bank analysts aren't convinced the underlying business has grown fast enough to support its lofty new valuation.
Is SoFi Technologies still a good stock to buy or has it run too far already? To find out, we'll look at why it shot higher this year and why Wall Street isn't so bullish anymore.
Why SoFi Technologies shot higher in 2024
SoFi Technologies stock is rapidly growing its member base by originating heaps of unsecured personal loans. Investors who had held back due to fear it was underwriting bad loans were relieved to see delinquencies longer than 90 days decline for two consecutive quarters after peaking at 0.72% earlier this year.
| Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | |
|---|---|---|---|---|---|
| 90+ Day Personal Loan Delinquencies | 0.48% | 0.56% | 0.72% | 0.64% | 0.57% |
Data by SoFi Technologies. Table by author.
The U.S. economy is entering a sweet spot for SoFi and its personal loan business. The Federal Reserve has already lowered interest rates by 0.75% in 2024 and another 0.25% reduction is widely expected on Dec. 18, 2024.
Lower rates can shrink profit margins, but the lending segment's volume gains more than make up the difference. SoFi's lending segment reported record revenue in the third quarter and a record contribution profit that increased 17% year over year to $238.9 million.
Lending isn't the only SoFi operation that's growing rapidly. Borrowers often sign up for checking, savings, and retirement accounts. In early 2023, the company's financial services segment was still losing money. Since then, it's been delivering a rapidly growing contribution profit that reached $99.8 million in the third quarter.
Instead of paying a software vendor to issue cards and process payments, SoFi Technologies owns the Galileo financial technology platform. SoFi is one of many financial institutions, including Toast and H&R Block, that use Galileo to automate financial tasks. Contribution profits from its tech platform segment rose to a record $33 million in the third quarter.
SOFI Net Income (TTM) data by YCharts.
SoFi Technologies is growing rapidly while keeping expenses under control. Management expects net income on a GAAP basis to reach $205 million at the midpoint of its guided range. This represents a slight decline but is still heaps better than the heavy losses it was reporting just a year ago.
Why the downgrade?
Despite operations that are firing on all cylinders, Bank of America analyst Mihir Bhatia recently downgraded SoFi stock to underperform. Bhatia reiterated a $12 per-share price target that implies a loss of roughly 22% from its closing price on Dec. 10, 2024.
Bhatia didn't broadcast any concerns regarding SoFi's underlying business. Instead, he cited the stock's nosebleed-inducing valuation. Its $16.6 billion market cap at recent prices is more than four times the bank's tangible book value.
Some investors argue an earnings multiple is a better valuation gauge for SoFi, but it's really expensive on this metric, as well. The stock has been trading for more than 80 times management's earnings estimate for 2024.
To justify its sky-high valuation, SoFi needs to grow faster than anyone should expect from an established bank. Buying more shares at its present valuation doesn't seem like a good idea. It's probably best to keep this stock on a watchlist and wait for a more sensible valuation.
