Shares of fintech specialist SoFi Technologies (NASDAQ:SOFI) are suffering on Monday after Wedbush analysts downgraded SOFI stock, warning about a possible significant decline in fee income. A climb in personal loan originations could also represent a headwind moving forward.
Specifically, Wedbush downgraded SOFI stock to “underperform” from “neutral.” This continues a trend that started earlier in May, when Wedbush experts cut their SOFI rating to “neutral” from “outperform.” Analyst have now forecast a price target of $2.50 as well, which represents a sharp loss from the current $4.70 price. In response, shares are slipping more than 5% currently.
Per a Barron’s report, the fintech specialist “could be ‘nearing a tipping point’ on the fee income it recognizes from loan applications and sales.” Further, fee income could suffer a substantial drop, posing headwinds for SOFI stock. On top of that, Wedbush asserts that the company’s capital levels “may be overstated using fair value accounting.” As a result, management may seek to raise more money this year.
Recently, company filings cited the possibility of a capital raise via equity or debt. According to Barron’s, a SoFi spokeswoman clarified the matter, stating that while the company does not intend to have net losses for the foreseeable future, it may need to raise equity or debt capital in case losses materialize.
Personal Loan Originations Are a Question Mark for SOFI Stock
Following an overall strong first quarter of 2023 earnings performance — where the fintech’s earnings loss of 5 cents fared better than an expected and a revenue tally of $460.16 million beat the consensus target — many investors rightfully expected a strong showing for SOFI stock. Instead, shares are crumbling right now. The culprit? Personal loan originations.
To be sure, the number itself appeared encouraging at face value. Per Barron’s, personal loan originations jumped 46% against the year-ago quarter to $2.95 billion. SoFi explained the surge as being “aided by years of investment in technology to automate and accelerate the application-to-approval process.”
However, JPMorgan analyst Reggie Smith told Barron’s that, because of recessionary concerns, “there’s an expectation of eventual heightened losses across consumer credit.” Smith continued, “Investors seem to be taking the sharp rise in personal loans this quarter as a sign of future losses.”
Indeed, it’s a matter that InvestorPlace covered months ago in February, prior to the banking crisis. Because personal loans tend to be unsecured, their rise may create problems down the line during economically challenging cycles.
Further, with the banking crisis arriving at a time of stubbornly high inflation and mass layoffs, consumers may find themselves in increasingly difficult conditions. Therefore, the personal loans issue could be one to watch carefully.
Why It Matters
To be sure, Wedbush’s bearish take on SOFI stock represents an outlier against the broader consensus. On TipRanks, analysts give SOFI a “moderate buy” rating. That’s based on nine buys, four holds and one sell. On average, the price target for shares stands at $7.65, implying nearly 62% upside potential.
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On the date of publication, Josh Enomoto 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.
