SoFi Technologies (NASDAQ:SOFI) has evolved from a personal-finance app to a full-fledged, legitimate lender over the past several years. Yet, not every expert on Wall Street is bullish on its future prospects. Indeed, one analyst just published a downgrade that stunned investors.
Where some folks see problems, others see opportunities. Thus, value seekers and contrarian investors may want to ponder whether a downgrade, which is really just one analyst group’s opinion, should taint the image of an up-and-coming fintech firm like SoFi Technologies.
Granted, not everyone will want to take a chance on a banking disruptor like SoFi Technologies. It’s also not a bad idea to consider the bearish side of the argument before buying a stock. However, when all is said and done, the bull case for SoFi Technologies might actually be stronger now that its share price is down.
Could lower interest rates be a problem for SoFi Technologies?
Heading into 2024, the market is making a number of assumptions. For one thing, investors have priced in at least three interest-rate cuts this year. Whether it’s realistic or not, the market seems to expect the Federal Reserve to reduce the federal funds rate half a dozen times or possibly even more than that.
There’s also a largely unspoken assumption that interest-rate reductions are net positive for banks. After all, lower borrowing costs can stimulate borrowing and lending activity, thereby enhancing banks’ bottom lines.
The case for multiple interest-rate cuts in 2024 just got a shot in the arm as the Bureau of Labor Statistics (BLS) reported 8.79 million job openings at the end of November, the lowest level since March 2021. According to Nationwide financial market economist Oren Klachkin, this “should please Fed officials as it marks another step toward healthier labor market conditions.”
Anything that could “please Fed officials” is probably good for the U.S. banking sector and therefore good for SoFi Technologies. A cooling labor market, along with November’s soft core inflation print, ought to keep SoFi bulls on the front foot.
Yet, maybe it’s not as simple as that. Mike Perito, an analyst with Keefe, Bruyette & Woods, seemed to suggest that reduced borrowing costs could actually be a problem for SoFi Technologies.
In a move that jolted investors, Perito downgraded SOFI stock from Market Perform to Underperform and slashed his price target on the shares from $7.50 to $6.50. First, he cited his concerns about SoFi Technologies’ valuation, which is elevated after December’s share-price run-up.
“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,” warned the Keefe, Bruyette & Woods analysts.
In addition, the analysts observed that SoFi Technologies marked up the value of its loan portfolio based on high interest rates. If those rates come down in 2024, it could weigh on the firm’s loan-book value.
An overreaction and an opportunity
There wasn’t really much else happening with SoFi Technologies on Jan. 3, so it’s reasonable to conclude that Perito’s downgrade, price-target cut and cautious commentary prompted that day’s sell-off in SOFI stock. It was quite a steep decline, with the share price dropping 13% as of midday.
It’s funny to watch people on social media panic during these types of situations. Undoubtedly, some traders were frustrated when they missed out on December’s rally in SoFi Technologies stock. Now that the share price is back down to a cheaper level, people are too fearful to hit the “buy” button.
The Keefe, Bruyette & Woods analysts had a fair point about SoFi Technologies’ high valuation, but they single-handedly caused that valuation to come down. If sellers push it another 5% or 10% lower, SoFi Technologies stock should be nearly irresistible for contrarian investors.
The argument that lower interest rates will reduce the value of the firm’s loan portfolio isn’t a new piece of information being introduced into the market (like an earnings report might be, for example). It’s only an analyst group’s newly published bearish estimates and arguments — nothing more, nothing less.
None of this negates SoFi Technologies’ expectation-beating top- and bottom-line third-quarter 2023 results. Nor does it eliminate the economy-spurring impact that interest-rate cuts will likely have this year. Thus, it’s a good idea to take all opinions with a grain of salt, set your buy price and stick to it, and not to let one day of volatility shake you out of a perfectly good opportunity with SoFi Technologies stock.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
