One of Wall Street's biggest winners of the day is SoFi Technologies, a diversified financial company whose shares have climbed 5.0% to a price of $15.22 -- 22.13% above its average analyst target price of $12.47.
The average analyst rating for the stock is hold. SOFI outperformed the S&P 500 index by 3.0% during today's morning session, and by 69.3% over the last year with a return of 92.6%.
SoFi Technologies, Inc. provides various financial services in the United States, Latin America, and Canada. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
SoFi Technologies's trailing 12 month P/E ratio is 126.9, based on its trailing EPS of $0.12. The company has a forward P/E ratio of 62.1 according to its forward EPS of $0.29 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US finance companies is 20.04, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
SoFi Technologies's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | -7,227,139 | 111,409 | -7,338,548 | 0.14 |
| 2022 | -7,255,858 | 93,201 | -7,349,059 | -424.01 |
| 2021 | -1,350,217 | 52,261 | -1,402,478 | -188.42 |
| 2020 | -479,336 | 6,932 | -486,268 | -426.7 |
| 2019 | -54,733 | 37,590 | -92,323 |
- Average free cash flow: $-3333735200.0
- Average free cash flown growth rate: -198.6 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for SOFI, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
SoFi Technologies's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.86 as of the third quarter of 2024.
With a higher P/E ratio than its sector average, an average P/B ratio, and negative cash flows with a downwards trend, we can conclude that SoFi Technologies is probably overvalued at current prices. The stock presents mixed growth prospects because of its weak operating margins with a positive growth rate, and an inflated PEG ratio.
