Sofi Is a Good Value With $2.5 Billion in Cash After Exercise of Warrants

Sofi Technologies (NASDAQ:SOFI) has tumbled since it closed its special purpose acquisition company (SPAC) deal and raised $1.9 billion in cash. SOFI stock peaked on June 8 at a closing price of $23.89. Since then it has fallen by 35.7%, or $8.52, to $15.37 as of July 28.

the Social Finance (SoFi stock) logo is displayed on a smartphone.

Source: rafapress / Shutterstock.com

However, SOFI stock is still worth significantly more, as I wrote last month. It’s worth between $23.91 and $27.80. We can update that target value soon. The company will release its second quarter results with more information on its cash balance and earnings on Aug. 12.

Cash Lowers SOFI Stock’s Valuation Metrics

There’s one more thing to take into account: Sofi has a lot of cash. Sofi’s existing $1.9 billion in cash is before any cash from warrants, which can be exercised now. That would bring in an additional $431 million plus $166 million from stock options according to page 20 of its recent prospectus filing. This will raise Sofi’s cash balance to about $2.5 billion.

It’s worth nothing that the final number will depend on whether the company was free cash flow (FCF) positive in Q2. This is a large percentage of its market value.

For example, right now SOFI stock has a market cap of $12.29 billion including the exercise of warrants, options and restricted stock units. This is based on data from page 20 of its prospectus, which reports that there will be 795.22 million shares outstanding with shares fully diluted. Therefore, Sofi’s $2.5 billion in cash will be 20% of its total market value. That effectively lowers its valuation metrics.

For example, on page 9 of its investor presentation, the company reaffirmed its prior guidance. It still expects to make $27 million in adjusted EBITDA  this year. Now with the lower enterprise value (EV) of about $9.79 billion (its market cap minus expected cash), the stock trades for an EV/EBITDA ratio of 362 times. That is pretty high, but it bodes well for its 2022 EV/EBITDA ratio.

I estimate that by 2023 the company will have a 15% to 20% EBITDA margin, putting its EBITDA around $400 million at a peak sales estimate of $2 billion. This means its $9.79 billion EV is only 24 times its $400 million in EBITDA.

Where This Leaves SOFI Stock

Analysts are as positive on the stock as I am. TipRanks.com indicates that 2 analysts have an average price target of $27.50 for SOFI stock. The same is true with Yahoo! Finance.

Certainly, the company’s CEO wants to grow Sofi into a mammoth financial entity. He recently told CNBC that it is a “one-stop shop” that includes multiple financial products like mortgages and personal loans. He also said the company’s goal is to provide a “lifetime’s worth of financial services to its ‘members’ — the name it prefers instead of ‘customers.'”

Sofi’s aspirations and ability to move into different financial arenas that interest millennials are the main reasons I think its stock is still cheap. For example, the firm now allows its brokerage clients to invest in cryptocurrencies and SPAC IPOs.

So, using the reasons and methodology from my last article, expect to see SOFI stock rise to a price between $23.91 and $27.80. However, investors should note this might not happen until mid-2023. In other words, based on the midpoint of my price target, the potential two-year return on investment (ROI) of 68.24% works out to 29.7% annually. That is actually a pretty good return for most investors.

On the date of publication, Mark R. Hake did not hold any position in any of the securities mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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