MW SoFi's stock surge is 'overdone,' analyst warns: It's 'difficult to justify' owning shares now
By Emily Bary
Compass Point initiates coverage of SoFi shares with a sell rating
It's now difficult to justify owning shares of SoFi Technologies Inc., which have flown more than 50% higher over the past month, according to one analyst.
Compass Point's Giuliano Bologna called the recent SoFi (SOFI) rally "overdone" as he initiated coverage of the stock with a sell rating and $5 price target Thursday. SoFi shares were down about 5% in Friday morning action and trading near $8.
SoFi's stock momentum lately partly reflects optimism about the financial-technology company's ability to benefit from the approaching end of the moratorium on student-loan payments, as solidified by the recent debt-ceiling deal, though Bologna said Wall Street's enthusiasm seems like an overreaction.
"The student-loan moratorium was already scheduled to end on June 30 with payments resuming 60 days later," he wrote. "Recent events are unlikely to have a material impact on that timeline and the recovery refinance origination volumes."
Read:SoFi's stock draws extreme reactions. What one analyst thinks will follow the latest surge
Bologna has other concerns as well, including about the company's fair-value accounting treatment of the loans it originates, which has been an area of controversy around the stock.
While Bologna doubted that SoFi would change its accounting treatment of loans, especially existing ones, he wrote that the company's held-for-sale approach "has been a front-end benefit to revenue/earnings but could become an overhang and risk in the future."
In general, he worries that a possible growth slowdown "could become an overhang for [SoFi] over the next few quarters and reduce profitability."
"Since [SoFi's] accounting flows through in different ways, we believe it's important to put the accounting impact in perspective since we believe the current accounting treatment creates a positive tailwind during period of high growth similar to the current environment," he wrote. "But it's also important to consider the potential negative impacts if growth slows ... because we believe [SoFi's] current capital levels could become a constraint to balance sheet growth" during fiscal 2024.
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Bologna also has questions about the company's technology businesses, which help other fintech players offer services to customers.
"[SoFi's] technology businesses are a source of growth and valuation optionality for the company in the future but full value may be difficult to justify as part of a bank with a large balance sheet," he wrote.
Bologna added that typically, "when balance sheet banks and non-banks have owned non-financial businesses that have minimal or no tangible equity but generate earnings, these companies have not been valued on a [sum-of-the-parts] basis splitting up the value of the higher-multiple technology or non-financial business from the financial business."
See also:Why SoFi's stock is this analyst's top pick in fintech
-Emily Bary
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June 23, 2023 12:00 ET (16:00 GMT)
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