By Emily Dattilo
SoFi Technologies stock fell sharply after one analyst team argued that shares have risen too far, too fast.
Keefe, Bruyette & Woods analysts led by Mike Perito downgraded SoFi to Underperform from Market Perform, lowered revenue and adjusted earnings estimates, and trimmed their price target to $6.50 from $7.50 in a Tuesday report.
SoFi shares tumbled nearly 14% on Wednesday and rebounded 1% on Thursday. Competitors Upstart Holdings and Affirm slipped over 2%, and Enova International was little changed.
For context, SoFi began as a lender focused on refinancing student debt and it now operates through three segments: lending, which includes student, personal, and home loans; financial services; and a technology platform.
There are a few factors prompting the rating slash. First, SoFi shares have gained 43% since reporting third-quarter earnings, compared to a 30% jump from the KBW Nasdaq Financial Technology Index recorded over the same period of time. Second, analysts revised their revenue and adjusted earnings estimates for SoFi to below consensus.
"SOFI's shares remain polarizing, but noise aside, anytime a growth stock is trading at premium valuations with 15-20% downside potential to consensus EBITDA, we believe a more cautious stance is appropriate," KBW wrote.
SoFi shares have rallied along with other equities on the notion that the Federal Reserve may begin cutting rates this year. But looking at the larger picture, this could actually weigh on earnings, thanks to the company's fair value accounting, analysts explained.
Here's the gist: SoFI sells off the loans it generates to other companies. It has marked up the value of the loans on its book to include the expected future resale price, interest, and fees, as Barron's reported last year . That can be risky when borrowing costs start to fall, KBW argued.
The team estimates that every quarter-point reduction to SoFi's fair-value mark for its held-for-sale loan portfolio equates directly to a $50 million drag on revenue, or five cents of earnings per share.
A few pennies might not sound like it can move the dial, but in this case, every cent matters. For its fourth fiscal quarter, management is aiming to report its first profit according to generally accepted accounting principles, and analysts have penciled in earnings of one cent a share, according to FactSet.
Investors don't have long to wait to see where the numbers land -- last year, the company posted its fourth fiscal quarter results in late January.
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