SoFi Technologies (SOFI) is a consumer lending and financial equity technology platform that has easily outperformed the broader financial sector over the past twelve months. However, despite impressive growth expectations, I’m bearish on this California company. The stock’s valuation is simply too high, and the high price paid for the expected growth comes with too much execution risk. It has also benefited from the macroeconomic environment and strong sentiment, which could change.
Front and center of my bear case is SoFi Technologies’ sky-high valuation. The company’s price-to-earnings (P/E) ratios are alarmingly high compared to industry medians, indicating potentially overvalued conditions. Currently, the non-GAAP price-to-earnings (TTM) ratio of 114.4x is 733.4% higher than the industry median of 13.7x. Even more worrying is the forward price-to-earnings ratio of 134.6x, which is 890% above the industry median.
These numbers suggest that investors are paying a significant premium for SoFi’s future earnings potential, which poses significant execution risk. The GAAP price/earnings ratios tell a similar story. TTM’s price-to-earnings ratio of 132.5x and forward price-to-earnings ratio of 119.5x are both significantly higher than industry medians. These valuations imply extremely high growth expectations that may be difficult to achieve. If we look at the estimated price-earnings ratios for the coming years, we see a sharp decline from 119.4x in 2024 to 25.3x in 2027.
Earnings growth is expected to average 60% over these years, which is impressive but implies a price-earnings-growth ratio (PEG) of 1.99. That is well above the sector average of 1.45. Furthermore, unlike many financial industry peers, SoFi doesn’t pay a dividend, making the PEG ratio seem even more expensive. Such high valuations leave little room for error and make SoFi vulnerable to market corrections if the company fails to meet these high growth expectations.
I’m also bearish because I believe SoFi’s valuation has evolved due to a very risky environment, which has contributed to a 121% increase in the last twelve months. The US market has had one of the strongest years in living memory, with the re-election of Donald Trump providing additional support. The stock’s success has been driven by record revenue and membership growth, partly due to the high interest rate environment and the resumption of student loan payments.
