Stock SOFI: SoFi gets a banking license, but it’s not really a good thing

Like so many special purpose acquisition companies (SAVS), Sofi Technologies (NASDAQ:SOFI) the stock has been volatile. Shares initially soared to $25 as excitement grew for the popular FinTech company.

Source: rafapress/

This also happened at a time when entrepreneur Chamath Palihapitiya was on a massive winning streak with his SPAC deals. So in that environment, SoFi was a hot property. Since then, however, the SPACs have crumbled, the Palihapitiya Accords in particular imploding. For example, once the popular insurance game Clover Health (NASDAQ:CLOV) plunged to less than $3 per share. This is a loss of over 70% for traders who bought this Palihapitiya SPAC at the opening price of $10.

In fact, given the rough market, it’s a bit of a surprise that SOFI stock is holding above the $10 mark. Part of this resilience could come from the banking license recently granted to the bank. However, as you will see, this is not something bulls should be too excited about. Here’s why.

Banks get much lower valuations than FinTechs

The bulls might push back the title of this article. It’s part of SoFi’s long-term business strategy to become a bank. And we didn’t know what regulators would think of giving it an endorsement. So doing it must be good news, right?

The downside, however, is twofold. On the one hand, if you value SOFI shares like a bank, rather than a FinTech company, the shares look excessively expensive.

Normally, banks are valued on a combination of their earnings per share, book value, return on equity (ROE), and dividend yield. Here, the SOFI stock has many flaws. Since the company is consistently unprofitable, it has little to offer on most of these metrics. There are no positive earnings, the ROE is negative and, of course, there is no dividend yield.

The only traditional banking metric where SoFi has a positive value is book value. There, SOFI stock is backed by $5.31 per share of assets. This puts SoFi shares at more than 2x book value. I would only pay that kind of figure for the best of the best in terms of national banks. SoFi, on the other hand, isn’t even particularly close to profitability, let alone attractive returns on capital.

For a bank that loses large sums of money, I would only pay a large discount on the book value. This would translate to a price target well below $5/share for SOFI stocks. When I buy banks, I’m looking to pay 15x earnings or less, get a decent dividend yield, and see an ROE above 10%. SoFi won’t be able to deliver these desirable banking metrics for many years, if ever.

Difficult to use spongy valuation multiples on banks

A SoFi fan might try to argue that the company should be valued on earnings or earnings before interest, taxes, depreciation and amortization (EBITDA). For a FinTech company, you might be able to make that argument.

However, it just doesn’t make sense to use these metrics on a bank. A bank – any bank – can significantly increase its income by providing lower quality loans. If you approve every loan that comes to your desk, you’ll enjoy massive revenue growth. For a moment. And then when those bad loans go bad, you go bankrupt. See All Subprime Lenders from 2003 to 2008 for an example of what happens when loan companies prioritize revenue growth at all costs.

EBITDA is also a useless measure for a bank. It’s right there in the name; EBITDA excludes interest. This makes sense for comparing certain types of businesses, where interest may represent very different parts of their capital costs depending on their balance sheets.

In banking, however, interest is an essential expense. When you take deposits, you have to pay savers interest on their capital. This has been the central tenet of the banking industry for centuries. It is nonsense to continue to use massed metrics such as EBITDA on a banking business.

Moreover, many of the favorable effects of being a FinTech disappear now that SoFi is a bank. For one, it will likely face much higher capital requirements as regulators comb through its balance sheet to ensure depositors’ funds are safe. Compliance and legal costs are also likely to be much higher, as banks operate under a mountain of paperwork. As SoFi becomes a bank, it loses much of its ability to disrupt the system from the outside.

Verdict of SOFI shares

It is easy to use more optimistic valuation multiples on FinTech companies. People imagine a disruptive future where the new company comes into the picture and rearranges its space.

Over time, however, these grand ambitions are often reduced. SoFi’s decision to become a bank shows this kind of evolution. SoFi must become the very type of institution it was meant to replace. Meanwhile, as a bank, it will now have to contend with the likes of JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) who spend billions on their technology platforms, possess a much larger operational scale and employ the most skilled credit professionals in the world.

Silicon Valley is good in many areas. However, it is not proven to be particularly good for real credit products. Incumbent players are exceptionally skilled at this game and there are huge barriers to entry. A FinTech company with a great app and marketing plan might be able to make some money.

But as SoFi is dragged into the banking trenches against far more established rivals, it will face a difficult task. Meanwhile, given its lackluster operating results, SOFI stock still appears to be significantly overvalued.

As of the date of publication, Ian Bezek had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to publishing guidelines.

Ian Bezek has written over 1,000 articles for and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a major New York-based hedge fund. You can reach him on Twitter at @irbezek.

Milton S. Rodgers