Truist Securities analyst Andrew Jeffrey reiterated SoFi Technologies, Inc (NYSE: SOFI) with a Buy and a $11 price target.
SOFI detractors argue that the resumption of Student loan payments and various other macro factors will slow loan growth, dent NIM hurt fair value, and more.
Jeffrey encouraged investors to recognize that, at least in SoFi's case, co-specific drivers likely significantly outweigh external risks. SoFi is a structural winner as the banking industry fragments, and DDAs move to digital platforms.
He sees the company's attractive high APY-savings accounts and leading tech as durable competitive advantages. He notes that its relatively modest mid-single % Personal loan share and growing funding advantage set it up for years of above-average organic revenue and EBITDA growth.
Although macro risks always loom over lending models, the analyst said SoFi-specific growth drivers materially outweigh these concerns.
Jeffrey is firmly in the Bull camp and believes fair value accounting is a more transparent measure of a loan's value vs. CECL.
However, he also flagged the pull-forward of NII associated with putting a loan on the balance sheet at a premium creates amortization-of-premium expense, which can dent future revenue and earnings if loan growth slows and adverse moves in underlying assumptions like charge-offs, discount rate, and prepayments can cause negative marks.
The analyst's comfort with SoFi's fair value assumptions rests on loan lives getting shorter, creating underwriting flexibility, NIM widening due to lower deposit-based funding costs, life-of-loan losses, which, while rising is still well below a 7%-8% assumption and improving non-Lending segment profitability.
The analyst recognized a risk that loan growth slows, a recession drives charge-offs sharply higher, and the co suffers a liquidity disruption or another external pressure fair value marks before SoFi reaches more balanced profitability.
However, given the company's current deposit/loan growth trajectory, he thinks the upside outweighs the risk.
Given the foregoing, he lifted his 2Q23 revenue/EBITDA estimates to $273 million/$65 million from $268 million/$44 million.
As mentioned, Jeffrey also took his C23 estimates above the Street but lowered his 2H23 EBITDA estimate to $150 million from $159 million, reflecting a smoother seasonal trend.
He reminded investors that SoFi has consistently guided reinvesting EBITDA with over 30% incremental margin. However, consensus reflects a 40%+ C24 incremental EBITDA margin, creating downside risk absent material revenue outperformance. He would use any weakness around such an adjustment as a buying opportunity.
Price Action: SOFI shares traded lower by 1.60% at $9.02 on the last check Friday.