SoFi Technologies, Inc. (NASDAQ:SOFI) is nearing all-time lows, and we are wondering if the company has enough future earning power to recover, or has the current climate changed the outlook. In this article, we will estimate what the company is expected to make from analysts vs. what it needs to make given the current price.
For a quick overview of the results of our analysis, here are the key takeaways:
- The market expects SoFi to make around US$300m profit in 2024.
- Analysts are forecasting profits of US$136m in 2024, but the risk-return requirements of marginal investors are increasing the demand for higher profits sooner than before.
- Rising interest rates may be impacting the reason why investors are demanding more and the stock is dropping.
As you can see, fundamentals matter, and we will go over SoFi's past and expected performance.
When we have a young company, without a reliable valuation, we can turn to the market cap and use it to see what are the implied earnings after a certain period. We do this calculation to discover what is "priced in" by the market.
The company currently has a market cap of US$6.8b (intraday), which implies that it makes earnings of US$302.6m in the fiscal year 2024.
We can calculate this by taking the market cap, time weighting it by the cost of equity in 3 years and multiplying by the cost of equity to arrive at the implied earnings.
Calculation: 6,8 ÷ 0,872 × 0,0388 = 302.6
We see that, given the current market value (stock price), the company needs to make a bit over US$300 million in 3 years in order to justify today's price.
Now we will compare this with analysts' forecasts and size up the difference.
According to the 13 industry analysts covering SoFi Technologies, the consensus is that the company will start generating positive profits of US$136m in 2024.
While it is great that the company is projected to become profitable a bit over 2 years from now, our calculation suggests that the current stock price has an additional US$166.5m of required or "priced in" earnings. This is by no means game over, as the company can make up for this difference with earnings even further out in the future. What we are currently seeing in the drop of the price, can be a change in patience from investors, more than a change in forecasts.
This change of patience or risk appetite, may come from increasing inflation, which impacts discount rates used in calculating the required returns by investors.
Breaking into profitability can be a large catalyst for a stock, as it validates that a business can serve a market and can capture some of the created value.
How fast will the company have to grow each year in order to reach the breakeven point by 2024?
Working backwards from analyst estimates, it turns out that they expect the company to grow 67% year-on-year, on average, which signals high confidence from analysts, and shows the breakeven point in 2024.
If this rate turns out to be too aggressive, the company may become profitable much later than analysts predict and possibly extend the drop in value.
Given this is a high-level overview, we won’t go into details of SoFi Technologies' upcoming projects, however, bear in mind that by and large a high growth rate is not out of the ordinary, particularly when a company is in a period of investment.
For investors that believe in this industry, and think that digital lending and financial services can create value for the future, then they can check some of SoFi's competitors:
This article is not intended to be a comprehensive analysis on SoFi Technologies, so if you are interested in understanding the company at a deeper level, take a look at SoFi Technologies' company page on Simply Wall St. We've also put together a list of pertinent aspects you should further research:
- Historical Track Record: What has SoFi Technologies' performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on SoFi Technologies' board and the CEO’s background.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data 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 financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.