Editor’s note: This article was updated on July 12, 2022, to correct the amount of potential gains.
You might assume that Sofi Technologies (NASDAQ:SOFI) is making a lot of money and its book value is growing quickly. That is partially the case. Sofi is a fin-tech company that mainly caters to millennial investors. But its growth and the value of SOFI stock is highly dependent on old-time financial things like interest rates, spreads and growth in its book value.
The good news is that in its Q1 earnings report the company was very ebullient about its 2022 expectations. Last quarter, its slide deck forecasted adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) will rise from $30 million in 2021 to $180 million in 2022.
Watching Book Value Per Share
Its book value, which the market looks at to value financial industry firms (especially during a recession), rose a good deal. Its shareholders’ equity (book value) rose from $4.37 billion at the end of 2021 to $5.211 billion on March 31. That is a gain of 19% in just one quarter.
Since Sofi Technologies now has a market capitalization of $5.67 billion, that means its price-to-book value is just over 1x. In fact, its book value per share (BVPS) is $5.69 per share. So, at $6.01 per share, the P/BVPS is 1.056x ($6.01/$5.69).
That is pretty typical for financial firms, but it is not uncommon for P/BV multiples to fall below 1x.
In addition, the market also watches the tangible BVPS, which deducts all non-real assets like goodwill, the value of patents (not really possible with a bank) and things like depreciated software values. The tangible BVPS for Sofi Technologies was $3.37 per share at the end of March, according to Seeking Alpha.
That means its price-to-tangible BVPS is relatively high at 1.78x (i.e., $6.01/$3.37). I believe it will stay high as long as its book value and tangible BVPS keep growing as they did during Q1.
Where SOFI Stock Could Be by the End of 2022
SOFI stock trades for just 1.1 times book value (BV). That is simply too cheap. If its BVPS keeps growing, by definition, the P/BVPS ratio falls as the denominator, BVPS, rises.
For example, we might assume that shareholders’ book value grows by 5% from Q2 through Q4. The result will be that the compounded growth rate in book value and tangible BVPS will be 15.76%.
That will put it at $6.59 per share. That is higher than the July 11 price of $6.01. As a result, the market is likely to give it a higher P/BV ratio, say 1.20x. That means the stock price could rise to $7.91 by sometime in early 2023 when the figures come out. This represents a potential gain in the stock of 31.6% from here.
How This Affects Tangible BVPS
The same is true for its price to tangible BVPS, except that the rise in tangible BVPS will be higher. The math is a little complicated here. Suffice it to say that the lower base number in the denominator rises quicker than the higher base number of regular book value.
For example, since shareholder’s equity grows by 15.76%, that represents a gain of $821 million (i.e., $5.21 billion x 15.76%). Now since there are 915.8 million shares outstanding, this represents a gain of 89.65 cents per share.
But if we add that 89.65 cents to the $3.37 tangible BVPS, its new value will be $4.27 per share at the end of the year (i.e., $3.37 tangible BVPS + $0.8965 gain in BVPS). But this represents a huge gain, as $4.27 is 26.7% higher than $3.37.
That will also mean that the market is likely to raise the P/Tangible BVPS multiple to over 2x, up from 1.78x now.
Here is how that works out. The new tangible BVPS, at $4.27 as we have seen, multiplied by 2x is $8.54 per share. That is much higher than the $7.91 per share target price just using P/BVPS. It represents a potential gain of 42% from today’s price, rather than the 31.6% gain with price/BVPS.
What This Means for SOFI Stock Investors
The result here is that we can assume that with good growth in the company’s book value and its tangible book value per share, SOFI stock will rise somewhere between 32% and 42% over the next six to eight months or so.
That puts its price target 37% higher at $8.83 per share. This is actually lower than the average of 11 analysts covered by TipRanks. Their average price target is $9.23 per share or 54% over today’s price.
The bottom line here is this — expect to see SOFI stock move significantly higher if its book value continues to grow each quarter.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.