SoFi Technologies (SOFI) is a consumer financial stock and lending technology platform that has vastly outperformed the broader financial sector over the past 12 months. However, despite impressive growth expectations, I am bearish on this California company. The stock’s valuation is simply too high and the high price paid for expected growth introduces too much execution risk. It has also benefited from the macroeconomic environment and strong sentiment, which could change.
Front and center in my bear case is SoFi Technologies’ sky-high valuation. The company’s price-to-earnings (P/E) ratios are alarmingly high compared to industry medians, indicating potentially overvalued conditions. Currently, SoFi’s non-GAAP P/E (TTM) ratio of 114.4x is 733.4% higher than the industry average of 13.7x. Even more concerning is the forward P/E ratio of 134.6x, which is 890% above the sector median.
These figures suggest that investors are paying a substantial premium for SoFi’s future earnings potential and this introduces considerable execution risk. GAAP P/E ratios tell a similar story. The TTM P/E of 132.5x and the Forward P/E of 119.5x are significantly higher than the sector medians. These valuations imply extremely high growth expectations that may be difficult to meet. If we analyze the estimated P/E ratios for the coming years, we see a sharp decrease from 119.4 times in 2024 to 25.3 times in 2027.
Earnings growth is expected to average 60% over these years, which is impressive but infers a price-earnings-growth (PEG) ratio of 1.99. That’s considerably above the industry average of 1.45. Additionally, SoFi doesn’t pay dividends, unlike many peers in the financial sector, which makes the PEG ratio look even more expensive. Valuations this high leave little room for error and make SoFi vulnerable to market corrections if the company fails to meet these high growth expectations.
I’m also bearish because I believe SoFi’s valuation has developed due to a high-risk environment, contributing to a 121% rise over the past 12 months. The US market has had one of the strongest years in living memory, with Donald Trump’s re-election providing additional support. The stock’s success has been fueled by record revenue and membership growth, in part due to the high interest rate environment and the resumption of student loan payments.
These factors have allowed SoFi to triple its revenue and accelerate its growth trajectory. However, this success also makes SoFi vulnerable to changing macroeconomic conditions and market sentiment. While the current expectation of interest rate cuts in 2025 supports SoFi’s growth prospects, any deviation from this path could impact the company’s performance. Additionally, the quality of SoFi’s loan portfolio is showing signs of deterioration, with a significant increase in loans delinquent for 90 days or more.
In the third quarter of 2023, the company also saw a five-fold increase in loan charge-offs compared to the previous year. This tends to indicate growing financial stress among consumers. This trend, along with record levels of consumer debt, suggests that SoFi’s current growth and profitability could face headwinds. With growth expectations so high, the stock could also be susceptible to broad swings in investor sentiment.
While I’m bearish on SoFi Technologies, I’m willing to accept that the stock could surprise me. This is indicated by positive earnings revisions and strong growth expectations. For the next quarter, 7 out of 10 analysts have revised their EPS estimates upward in the last 90 days, indicating optimism about the company’s performance in the near term.
Looking ahead, SoFi’s earnings growth projections are impressive. Analysts expect EPS to more than double, from $0.13 in 2024 to $0.28 in 2025, representing a year-over-year increase of 111.7%. This growth trajectory is expected to continue, with EPS forecast to reach $0.79 by 2028, implying a compound annual growth rate of over 50% between 2024 and 2028.
However, the aforementioned lofty valuation leaves little room for error and creates substantial execution risk for SoFi. The company must consistently meet or exceed these high growth expectations to justify its current stock price. Mistakes in execution will likely be punished by the market. That’s why I simply can’t invest.
On TipRanks, SOFI is listed as a Hold based on five Buy, seven Hold, and two Sell ratings assigned by analysts in the past three months. The average price target for SOFI stock is $10.29, which implies a downside risk of around 34.75%.
See more SOFI analyst ratings
I am bearish on SoFi Technologies despite its impressive growth expectations and strong momentum. The stock’s sky-high valuation leaves little room for error and introduces substantial execution risk, which I believe is supported by the stock’s average price target.
Additionally, SoFi’s success has been driven in part by a favorable macroeconomic environment and strong market sentiment, which could change. Additionally, signs of loan portfolio deterioration and record levels of consumer debt raise concerns about the sustainability of SoFi’s current growth trajectory. While the company might positively surprise me, the potential rewards simply don’t justify the high risks.
