Morgan Stanley downgrades SoFi, says stock should be valued like a bank

Published Thu, Jul 13 20235:53 AM EDTUpdated Thu, Jul 13 202311:36 AM EDT

SoFi Technologies is worth selling as it acts more like a full-fledged bank, according to Morgan Stanley. Analyst Jeffrey Adelson downgraded the financial stock to underweight while raising his price target 50 cents to $7. Still, Adelson's raised price target implies shares could tumble 23.9% in the next year from Wednesday's close. "We previously valued SOFI on a growth-adj. basis, given strong growth well above most banks/consumer lenders," he said in a note to clients Thursday. "But as SOFI looks increasingly like a bank, we believe it needs to be valued more like a bank." Shares fell nearly 5% in Thursday premarket trading. But the stock, which is known for its refinancing of higher-rate loans for graduate students, has nearly doubled its share value this year. SOFI YTD mountain SoFi, year to date Part of the multiple for SoFi is based on the expectation of reaching 30% return on average tangible common equity, which Adelson said appears too optimistic given his estimates for a 15% return by the end of 2026. But that has been partially overlooked in the past because of revenue growth that has been stronger than peers and its path to increasing profitability. Now, he sees a skewed risk/reward balance, with a nearly 70% downside to the bear outlook paired with the potential for a 30% upside on the bull case. Unlike many banks, net charge-offs, which looks at the ratio between loan losses to the total given for borrowing, can flow through to SoFi's revenue. Net interest margin and fee income could also be pressured this year, he noted. SoFi has been considered a full bank for about a year and a half, he said, after being previously seen as more of a financial technology stock. Student loan payments restarting may also have a smaller effect than anticipated, Adelson said. He expects the total addressable market after the moratorium ends to be between $70 billion and $110 billion compared with a company forecast of about $200 billion. This looks at just that higher-rate debt for graduate students that has become known as SoFi's bread-and-butter work since the early 2010s, with about 60% of remaining debt falling within the company's credit box. The 12-month grace period could be a headwind, he said. Overall, his forecasts for volume by 2024 are below Wall Street consensus and one-third less than what was expected before the Covid-19 pandemic. Adelson noted the stock could be helped by a rise in mortgages or sales rebound. Any technological wins and earnings day expectations beats could also provide a boost, he said, as could interest rates dropping sharply. — CNBC's Michael Bloom contributed to this report.