Investors have cooled recenty on SoFi Technologies (NASDAQ:SOFI) stock, which may surprise some. After all, in late October this fintech firm/neobank unveiled strong quarterly results and promising updates to guidance. However, a recent valuation development has stuck in the minds of investors and started to counter the positive takeaways from the latest earnings release.
This news may continue to weigh on the stock in the immediate term. Even so, I wouldn’t assume that the long-term bull case for shares has been shattered. Better yet, with said news holding down SoFi at a reasonable entry price, for those looking to enter a position, this turn of events may work to your advantage.
SOFI Stock and Recent Concerns About Loan Valuation
As Barron’s detailed on Nov. 21, the “very good reason” behind the sentiment shift has to do with how SoFi values personal loans that it makes to members, which are then securitized and sold. In a nutshell, instead of using the cost accounting methods to value these loans, the neobank instead uses fair value accounting methods.
SoFi is then able to mark up the value of its loans (to account for origination and future servicing fees), then book this premium as revenue, right at the time of origination. While an allowed accounting practice, some analysts are critical of SoFi’s use of fair value accounting, alleging that using this method results in inflated revenue and book value figures.
Admittedly, I can see why this method is viewed as risky. Aggressive valuations today could lead to adjustments down the road. This could negatively affect future results. Still, I wouldn’t count on this factor as something that could cause the beginning of the end for the company, or for SOFI stock.
There’s not yet a need to change your view. Again, this development may have created an opportunity to buy, instead of a reason to sell.
Why the Long-Term Bull Case Remains Intact
Before changing your view on SOFI stock from bullish to bearish because of the neobank’s use of fair value accounting, keep a few things in mind. First, while attention to this issue has increased recently, this is not a new risk/concern for Sofi.
In fact, according to a TipRanks commentator, Oppenheimer analyst Dominick Gabriele laid out a convincing argument why this accounting practice is sound.
Largely, because historical loan securitization data backs up SoFi’s fair value calculations. Mizhuo’s Dan Dolev, quoted in the Barron’s piece, also makes a similar argument, stating SoFi’s calculations are realistic, and the use of fair value accounting.
While this accounting practice may help SoFi make it to GAAP profitability, it’s not the only factor at play behind the fintech’s narrowing losses. The continued growth of SoFi’s membership base is playing a role. So too, is the rebound in demand for the company’s student loan refinancing products.
Don’t forget, either, that another SoFi subsidiary, Galileo Financial Technologies, continues to experience strong growth as well. Taking all of this into account, it’s far too early to say that the SOFI bull case is no longer intact.
Take Advantage of This Latest Round of Weakness
As revenue growth continues, SoFi remains set to report its first quarter of GAAP profitability. In 2024, the company is expected to report its first full year of positive GAAP earnings (7 cents per share).
From there, thanks to operating leverage, incremental revenue growth could lead to outsized earnings growth. For instance, forecasts call for earnings to increase more than threefold in 2025.
Over the next year, further signs of outsized earnings growth in the late 2020s (and beyond) could help justify a rebound for the stock. Such a rebound could even send SOFI back to its 52-week high ($11.70 per share).
Bottom line: seize the opportunity. feel free to take advantage of this latest round of weakness with SOFI stock. Concerns about fair value accounting could ease once again. Bullish sentiment may then return, sparking a big comeback for shares.
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.
