SoFi Technologies (SOFI) is a lending technology platform and consumer financial stock that has vastly outperformed the wider financial sector over the past 12 months. However, despite impressive growth expectations, I’m bearish on this Californian 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 benefitted from the macroeconomic environment and strong sentiment, which could change.
Front and center of my bear case is SoFi Technologies’ sky-high valuation. The company’s price-to-earnings (P/E) ratios are alarmingly high compared to sector medians, indicating potentially overvalued conditions. Currently, SoFi’s non-GAAP P/E (TTM) ratio of 114.4x is 733.4% higher than the sector median 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. The GAAP P/E ratios tell a similar story. The TTM P/E of 132.5x and forward P/E at 119.5x are both significantly higher than sector medians. These valuations imply extremely high growth expectations that may be challenging to meet. Looking at estimated P/E ratios for the coming years, we see a strong decrease from 119.4x in 2024 to 25.3x in 2027.
Earnings growth is expected to average 60% over these years, which is impressive but infers a price-to-earnings-to-growth (PEG) ratio of 1.99. That’s considerably above the sector average of 1.45. Moreover, SoFi doesn’t pay a dividend, unlike many peers in the financials sector, making that PEG ratio look even more expensive. Such lofty valuations 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 very risk-on environment, which has contributed to a 121% surge over the past 12 months. The U.S. market has delivered one of the strongest years in living memory, with Donald Trump’s re-election providing additional support. The stock’s success has been driven by record revenue and member growth, partially 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 outlook, any deviation from this path could impact the company’s performance. Moreover, SoFi’s loan portfolio quality is showing signs of deterioration, with a significant increase in loans delinquent for 90 days or more.
In Q3 of 2023, the company also experienced a fivefold increase in loan charge-offs compared to the previous year. This tends to indicate growing financial stress among consumers. This trend, coupled with record-high consumer debt levels, suggests that SoFi’s current growth and profitability could face headwinds. With such high expectations for growth, the stock could also be susceptible to broad shifts 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 upcoming quarter, 7 out of 10 analysts have revised their EPS estimates upward in the last 90 days, indicating optimism about the company’s near-term performance.
Looking further 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 111.7% year-over-year increase. This growth trajectory is expected to continue, with EPS forecasts reaching $0.79 by 2028, implying a compound annual growth rate of over 50% from 2024 to 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. Missteps in execution will likely be punished by the market. That’s why I simply can’t invest.
On TipRanks, SOFI comes in as a Hold based on five Buys, seven Holds, and two Sell ratings assigned by analysts in the past three months. The average SOFI stock price target is $10.29, implying about 34.75% downside risk.
I’m bearish on SoFi Technologies despite its impressive growth expectations and very 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 average share price target.
Moreover, SoFi’s success has been partly driven by a favorable macroeconomic environment and strong market sentiment, which could change. Additionally, signs of loan portfolio deterioration and record-high consumer debt levels raise concerns about the sustainability of SoFi’s current growth trajectory. While the company could surprise me to the upside, the potential rewards simply don’t justify the high risks.
