Price Action Thesis
We follow with a detailed analysis of the price action on SoFi Technologies, Inc. (NASDAQ: SOFI) stock from our previous article, as there have been significant developments in its price action.
As we said, SOFI stock has seen sustained selling pressure at its near-term resistance, as the market rejected buying momentum from its May low.
The recent sell-off has forced SOFI back near its May lows, but we have noticed that this could be a near-term bottom. Accordingly, we believe it is appropriate to revise our sell rating to speculative long pending the retest of price action. We also urge sellers who have sold short to consider hedging their positions. Notably, selling pressure failed to wipe out its May lows, which is positive for the stock.
Our reverse cash flow valuation analysis indicates that SoFi could meet its revenue targets through CQ2’26 at current levels. But, our metrics are premised on the noticeable improvement in SoFi’s profitability in FCF throughout FY24. Therefore, investors should consider our baseline less reliable than average and should therefore demand a higher hurdle rate. raised to add exposure.
As such, we are revising our speculative buy sell rating. However, we did not see any trap price action from the bear to signal a potential reversal of its bearish bias. Therefore, investors should consider employing appropriate risk management strategies to minimize steep losses for SOFI shares if their May low does not hold.
SOFI’s May Low Holds Well So Far
SOFI stock surged from its May lows and formed a bullish trap at its short-term resistance, as we postulated in our previous article (Sell Note). As a result, SOFI stock has fallen around 25% (at the time of writing) since our last article was published.
Notably, bear trap price action that can help stem further decline remains elusive. Therefore, we have not observed a price action trigger that could signal a lasting reversal in its bearish momentum.
Nonetheless, we have noticed that its price action may be bottoming above its May lows and starting to base (but still too early to validate). Therefore, more conservative investors may consider watching sustained consolidation in SOFI shares before adding exposure. If not, it seems possible that SOFI will hold onto its May lows and potentially form a bearish trap price trigger thereafter.
SOFI assessment is less aggressive now
|Current market capitalization||$5.22 billion|
|Hurdle Rate of Return (CAGR)||30%|
|FCF yield required in CQ2’26||2.5%|
|TTM FCF margin assumed in CQ2’26||12.5%|
|Implied TTM revenue by CQ2’26||$2.98 billion|
Reverse cash flow valuation model for SOFI shares. Data source: S&P Cap IQ, author
Given its more constructive price action, we have revised our reverse cash flow valuation model to try to model the market valuation of SOFI shares.
We believe a minimum rate of 30% is appropriate, down from our previous rate of 35%. However, we have increased our FCF return requirement (which we use for typical high-growth opportunities) to 2.5%, up from our previous requirement of 2%. Therefore, we intended to strengthen our model but give space to SoFi to prove its ability to grow rapidly.
We have applied a TTM FCF margin of 12.5%, significantly lower than the Street consensus (analysts are optimistic) for FY24, to account for an appropriate discount. Therefore, we have arrived at a TTM revenue requirement of $2.98 billion for SoFi to release by CQ2’26.
Revised consensus estimates indicate that SoFi could generate revenue of $2.74 billion in FY24. As a result, SoFi is expected to generate a revenue CAGR of 5.76% of FY24-CQ2’26.
We believe it is possible for SoFi to meet our revenue targets at the current valuation as long as it continues to execute. Nonetheless, it is imperative for SoFi to continue improving its FCF profitability. Therefore, investors should carefully monitor management’s comments and guidance on its profitability, as this could have a significant impact on its valuation.
Additionally, SoFi is expected to remain unprofitable on a GAAP EPS basis, which could affect investor sentiment.
Is the SOFI share a buy, a sell or a hold?
We are revising our rating on SOFI shares from speculative Sell to Buy. Given its unprofitability, we urge investors to be disciplined with their hurdle rates. Moreover, its profitability estimates in FCF remain very speculative for the moment.
Nevertheless, we think it could be at a near-term low. Therefore, it is essential to observe how the market intends to price SOFI shares as the selling pressure has been absorbed at current levels. Therefore, it is constructive to help SOFI stock consolidate/base at current levels going forward.
However, we did not see any trapping price action from the bear to help thwart its bearish momentum. As a result, further selling to force liquidation before forming a validated bear trap cannot be ruled out. Accordingly, investors are advised to employ sound risk management, given its dominant bearish momentum.