SOFI Stock Could Fall 36.5% to 80% of Book Value During a Recession

 SoFi Technologies, Inc.$SoFi Technologies Inc.(SOFI)$ (NASDAQ:SOFI) is very ebullient about its 2022 expectations. Last quarter, its slide deck forecasted adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will rise from $30 million in 2021 to $180 million in 2022. The only problem is the Federal Reserve (Fed) is now raising rates. That could put a damper on its outlook when it reports its first quarter (Q1) lending results on May 10. As a result, SOFI stock could become vulnerable.

However, it is not as if this danger to SoFi’s lending and earnings outlook is not already reflected in SOFI stock. For example, it is near its lows for the year at $6.55 per share on Apr. 25, down 58.6% for the year. That shows that investors are not very enthusiastic about the stock’s prospects going forward.

But have things been overdone on the downside for SOFI stock? For example, it trades for just 1.33 times book value and 5.37 times sales. The stock traded for 14.6 times saleslast year on average. So, maybe SOFI stock is cheap here.

Valuing SOFI Stock Based on Price-to-Book Value

However, we need to focus on the specifics. First of all, the company reported that its shareholder’s equity was $4.377 billion at the end of 2021. Given that its market capitalization (cap) as of Apr. 25 is $5.238 billion, that puts it at a price-to-book (P/B) value metric at just 1.20x, not 1.33 times. The problem here, though, is that adjusted EBITDA profits will not necessarily translate into positive net income and higher book value (i.e., shareholders’ equity) for 2022. As a result, the P/B value could actually be higher if shareholders’ equity falls in Q1 and thereafter. That could lead to a lower price for the stock.

Here is one scenario that could play out: If the Fed’s higher interest rates reduce the volume of loans and profits at Sofi, that could lead to lower adjusted EBITDA and potentially a lower book value. Let’s say it falls 5% to $4.158 billion. Next, let’s say that the market decides to price financial asset companies like SOFI at below book value. This could occur if they assume that lending profits and losses could lead to book value dropping even lower. This often occurs during recessions.

Therefore, at 80% of book value, the market cap for SOFI stock would drop to $3.326 billion. That represents a decline of 36.5% from the market cap of $5.238 billion. This implies that SOFI stock could still fall over one-third to $4.16 per share (i.e., 65.5% x $6.55 per share price). So, let the buyer beware with SOFI stock. Most investors should wait until the company updates its financial outlook on May 10.