Is SoFi Technologies (SOFI) Getting Too Expensive For Its Returns?

Simply Wall St.10-01

SoFi Technologies has seen its share price swing sharply in recent years, and the question now is whether the current valuation is really supported by the returns the business earns on the capital it ...

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SoFi stock has delivered a 105.5% gain over the past 3 years, which puts a lot of weight on whether the company’s return on its invested capital can keep justifying that kind of move. The launch of SoFiUSD as a bank issued stablecoin and its use to settle card transactions on Mastercard’s network can influence future profitability by affecting funding costs, fee income and how efficiently SoFi uses its balance sheet. If you'd rather focus on earnings, this one's for you. See what SoFi Technologies's 31.9x P/E says about the price.  The issue now is whether the price investors see today is aligned with the returns SoFi can realistically earn on its capital over time. If you want more ways to benchmark SoFi Technologies against other opportunities, explore a focused screen of 31 high quality undervalued stocks. AdvertisementIs SoFi Technologies Getting Expensive on Excess Returns? The Excess Returns model values SoFi Technologies by comparing the returns it earns on shareholder capital with the return investors demand. It looks at whether each extra dollar of equity is likely to create or destroy value over time. SoFi is modeled with Book Value of $8.58 per share and a Stable Book Value of $10.31 per share, which points to meaningful capital already invested and expected to grow. The framework uses a Stable EPS of $0.91 per share against a Cost of Equity of $0.83 per share, implying an Excess Return of $0.08 per share and an Average Return on Equity of 8.87%. That spread is positive but not large, so the model implies that value creation is present but not dramatic. Because the Excess Returns projections put SoFi Technologies' estimated intrinsic value meaningfully below the current share price of $15.72, the market price is assuming stronger profitability than this set of inputs implies. The recent SoFiUSD launch with Mastercard gives the story a new angle on potential returns, which helps explain why enthusiasm in the share price can run ahead of what the current Excess Returns math supports. Find out what SoFi Technologies could be worth using our Excess Returns estimate. The SoFi Technologies Narrative: What Would Justify Today's Price? SoFi Technologies' valuation puzzle only really starts to make sense once the underlying storylines are made explicit. Narratives on Simply Wall St's Community page set out which paths for growth, margins and earnings would need to play out for the stock to be worth materially more or less than today's price. Each one treats fair value as a thesis about how the business might perform that you can track over time, rather than a static number. Community views on SoFi Technologies now split cleanly between a super-app and infrastructure upside story and a more cautious read on margins and competition. Bull case: 32% undervalued \"The core investment opportunity relies on a major market misunderstanding: The market values SoFi as a traditional lender, but it is actually transitioning into the \"AWS of Fintech\"…\" Discover why this Narrative puts SoFi Technologies at 32% undervalued. Bear case: 12% overvalued \"SoFi’s impressive growth trajectory faces several potential risks that could impact its long-term outlook…\" Explore why this Narrative puts SoFi Technologies at 12% overvalued. One last SoFi Technologies check before you move on Price, narrative and capital returns only tell part of the story, since SoFi Technologies still has specific concerns flagged by our broader checks that are worth weighing for yourself. Take a closer look at 1 major warning sign before settling on a valuation.  This article by Simply Wall St is general in nature. We provide commentary based on historical data\n        and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your\n        financial situation. We aim to bring you long-term focused analysis driven by fundamental data.\n        Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.\n        Simply Wall St has no position in any stocks mentioned.New: Manage All Your Stock Portfolios in One PlaceWe've created the ultimate portfolio companion for stock investors, and it's free.• Connect an unlimited number of Portfolios and see your total in one currency• Be alerted to new Warning Signs or Risks via email or mobile• Track the Fair Value of your stocksTry a Demo Portfolio for FreeHave feedback on this article? Concerned about the content? Get in touch with us directly. 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