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SUMMARY
Parkev Tatevosian, CFA, conducts a detailed discounted cash flow valuation of SoFi Technologies, assessing its growth prospects and risk profile. The analysis concludes that while SoFi's current market price is slightly below its calculated fair value, the stock is best considered fairly valued when a margin of safety is applied.
MAIN POINTS
- SoFi's stock has declined from its all-time high of $33 to around $15, prompting a fair value assessment using a discounted cash flow model.
- The analysis forecasts significant long-term growth for SoFi, but emphasizes the need to discount future cash flows due to the time value of money and opportunity cost.
- SoFi's cost of equity is estimated at 19.3% due to a high beta of 2.45, reflecting substantial volatility compared to the S&P 500.
- A market risk premium of 6% is used, reflecting a riskier-than-usual macroeconomic environment with geopolitical tensions and leadership uncertainties.
- SoFi's capital structure consists of 11% debt and 88% equity, resulting in a weighted average cost of capital of 17.85%.
- The calculated fair value for SoFi is $16.16 per share, slightly above the market price, leading to a buy rating despite the stock being only modestly undervalued.
DETAILED ANALYSIS
SoFi Technologies' stock has experienced a significant decline from its peak, now trading at less than half its all-time high. A discounted cash flow (DCF) analysis is employed to determine whether this lower price represents an undervalued opportunity. The DCF model incorporates projected free cash flows extending into the distant future, reflecting management's ambitious goal of becoming a comprehensive financial services provider.
These projections are discounted to present value, accounting for both the time value of money and the opportunity cost of alternative investments, such as risk-free government bonds currently yielding around 5%.
Risk is a central consideration in the valuation. SoFi's high beta of 2.45 indicates that its stock price is more volatile than the broader market, leading to a higher cost of equity at 19.3%. The weighted average cost of capital (WACC) is calculated at 17.85%, factoring in SoFi's capital structure of 11% debt and 88% equity.
The macroeconomic environment is also deemed riskier than usual, with a market risk premium set at 6% due to ongoing geopolitical tensions, trade uncertainties, and changes in Federal Reserve leadership.
After discounting future cash flows and adjusting for non-operating assets and debt, the analysis arrives at a fair value of $16.16 per share for SoFi. With the current market price at $15.23, the stock appears modestly undervalued. However, when a 10% margin of safety is applied, SoFi is considered fairly valued. Despite this, the stock is still rated as a buy, reflecting confidence in its long-term prospects and the potential for upside if management's growth plans are realized.
LINKS
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on stock evaluation.
- Discounted access to Fiscal.ai for investment research.
- Webull sign-up with bonus shares.
- Subscription link for Parkev Tatevosian's Substack newsletter.