SOFI stock’s sky-high valuation can’t be justified by exciting growth

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 prospects, any deviation from this path could have an impact on the company’s performance. Additionally, the quality of SoFi’s loan portfolio is showing signs of deterioration, with a significant increase in the number of loans that are 90 days or more delinquent.

In the third quarter of 2023, the company also saw a five-fold increase in loan charge-offs compared to the previous year. This tends to indicate an increasing financial burden on consumers. This trend, coupled with record levels of consumer debt, suggests that SoFi’s current growth and profitability could face headwinds. With such high growth expectations, the stock could also be vulnerable to widespread changes in investor sentiment.

Although 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 coming quarter, 7 out of 10 analysts have revised their EPS estimates upward in the past 90 days, suggesting optimism about the company’s near-term performance.

Looking further ahead, SoFi’s earnings growth projections are impressive. Analysts expect earnings per share to more than double from $0.13 in 2024 to $0.28 in 2025, a year-over-year increase of 111.7%. 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 high valuation leaves little room for error and poses significant execution risk for SoFi. The company must consistently meet or exceed these high growth expectations in order to justify its current share price. Execution missteps are likely to be penalized by the market. That’s why I just can’t invest.

On TipRanks, SOFI is rated a “Hold” based on five Buy, seven Hold, and two Sell ratings assigned by analysts over the past three months. The average price target for SOFI stock is $10.29, which represents approximately 34.75% downside risk.

See more SOFI analyst ratings

Despite the impressive growth expectations and very strong momentum, I’m bearish on SoFi Technologies. The stock’s sky-high valuation leaves little room for error and presents significant execution risk, which I believe is supported by the average share price target.

Additionally, SoFi’s success is partly due to a favorable macroeconomic environment and strong market sentiment, which could change. Additionally, signs of loan portfolio deterioration and record levels of consumer debt raise concerns about the sustainability of SoFi’s current growth trajectory. While the company might surprise me positively, the potential benefits simply don’t justify the high risks.

Disclosure