BofA Downgrades Rating Amid Concerns Over SoFi's Valuation
On Monday, shares of SoFi Technologies, Inc. (NASDAQ: SOFI) fell by 2.2% following a downgrade by BofA Securities. The financial services company's rating was lowered from Neutral to Underperform, with a new price target set at $12.00. The downgrade comes after SoFi shares have risen over 60% year-to-date and outperformed the S&P 500 during the same period.
According to BofA Securities, the recent three-month increase in SoFi's stock price can be attributed to factors such as Trump's election and positive third-quarter results. SoFi's performance has been particularly strong, as it is expected to benefit from anticipated policies under the Trump administration, especially in the student loan refinancing business. Despite these positive developments, BofA Securities suggests that the current valuation may be overly optimistic, pointing out that SoFi shares are trading at a premium compared to competitors.
SoFi has provided long-term guidance for 2026, forecasting earnings per share (EPS) in the range of $0.55 to $0.80. Even if SoFi reaches the upper limit of this guidance, its shares are currently trading at 20 times the projected EPS for 2026, which BofA Securities considers a premium valuation. The firm has made the downgrade decision, stating that this premium makes the risk-reward balance less attractive.
The analyst's report also notes that SoFi's current valuation is 32 times the expected EPS for 2026, which is higher than most established consumer finance companies. While SoFi's aggressive growth targets and expected EPS growth of 20-25% in the future are appealing, the high valuation carries an increased application risk and raises concerns about the sustainability of such a premium.
Additionally, BofA Securities highlighted investors' concerns about fair value mark-to-market issues and the impact of hedging activities. With SoFi reporting a $273 million hedging loss in the third quarter, there is a risk that these losses could increase with further interest rate cuts and potential market volatility. Furthermore, the slower growth in SoFi's technology segment due to extended timelines for closing deals and partnerships has provided less clarity on the company's revenue acceleration expectations.