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SOFI Stock May Underwhelm Investors as It Becomes More Like a Bank

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Sofi Technologies (NASDAQ:SOFI) may still be considered a fintech company. But with a bank charter in hand, it could morph into something that has more in common with Bank of America (NYSE:BAC) than PayPal (NASDAQ:PYPL) or Block (NYSE:SQ). This may or may not be good news for SOFI stock.

the Social Finance (SoFi stock) logo is displayed on a smartphone.

Source: rafapress / Shutterstock.com

It’s unclear whether in the long run, the market will continue to value shares in line with its digital-first financial supermarket rival. Alternatively, years down the road, SOFI stock might find itself trading at a low-to-mid teens price-to-earnings (P/E) ratio, like BofA and other major banks.

If it’s the former, then it makes perfect sense to dive into SoFi. As this former special purpose acquisition company (SPAC) trades near its original offering price, there’s ample upside potential. Yet if it’s the latter, there’s no need to dive in at current prices.

Instead, if you’re bullish on SOFI stock staying on the growth train, you may want to wait for it to take another dive. This could happen as changes in the market further lower the appeal of fintech plays.

The Latest With SOFI Stock

After the close on March 1, Sofi Technologies reported results for the December quarter. Total revenue of $285.6 million came in ahead of analyst estimates of $279 million. Net losses per share of 15 cents came in slightly above the 16 cents per share in losses Wall Street expected.

In addition, Q4 revenues were up 66.5% year-over-year. While still operating in the red, net losses per share were far narrower than reported for the prior year’s quarter at $1.85 per share. This, plus news of it adding 523,000 new members to its platform, resulted in a somewhat positive response from investors. The following trading day, SOFI stock gained 3.39%.

But this post-earnings boost has so far proven to be short-lived. Right after its jump on March 2, shares plunged 7.7% on March 3. Now, much of this drop was market-driven. Volatility is ratcheting up again given inflation, interest rates and the uncertainties of Russia’s invasion of Ukraine. These uncertainties, plus growing pessimism about fintech plays, remain the main driver for SoFi and similar stocks.

For all, that’s bad news in the short term. To some, it may be good news in the long term, as it means you can buy SOFI stock at what in hindsight could prove to be a depressed valuation. But over the next few years, gains (if any) could be minimal.

Future Returns May Be Lower Than Expected

As member growth continues, and as the company becomes a one-stop shop for financial products, SoFi might not stay in the red for long. Per analyst projections, earnings are set to turn positive by 2025, with SoFi earning 41 cents per share by 2025.

With this, you may think this gives SOFI stock the justification to move toward past highs. Perhaps even faster, if results come in at — or top — the high end of forecasts.

But if you subscribe to this argument, you may be making a big assumption that the market will continue to value SoFi like a fintech play. Instead, as the advantages it’s obtaining from becoming a bank (low-cost deposits in order to make loans) help it become profitable, the market may start valuing SOFI stock more like a regular old bank.

I’m not saying this will happen immediately. Yet by 2025, this may be the case. That means not much upside for shares, even if it hits the top end of its earnings per share estimates for that year (59 cents) and sports a P/E ratio at the top end for bank stocks around 15x. If this played out, the stock would be trading for just $8.85 per share.

Wait for Another Plunge in SOFI Stock

Sure, it’s not set in stone that morphing into a bank stock is this fintech firm’s ultimate fate. But even if the market continues to treat it more like a fintech play, that might not mean high upside, either. As it matures, SOFI stock may struggle to trade at that much higher of an earnings multiple.

20x to 25x may be the best it can do, like what PayPal stock trades for today. A 25x multiple on 59 cents gives you $14.75 per share. That’s a fairly big bump from today’s prices, yet not that spectacular of a long-term return.

There is a chance this stock has more room to fall before it finally bottoms out. The rotation from growth to value may not be over. Even if you’re confident it can grow at or above expectations, wait until this happens. At best, SOFI stock may only move from current prices to around $14.75 per share over the next few years.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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