After hitting the public markets in June 2021, SoFi Technologies (NASDAQ: SOFI) hasn’t really panned out as hoped for investors. Among market traders, interest in tech-enabled businesses, especially unprofitable ones, has decreased, which goes some way to explain why the stock trades down about 59% from its IPO price.
Still, share prices made a partial recovery so far in 2023, trading up 98% and crushing the comparable return of the Nasdaq Composite by a wide margin. If a stock performs this well over a relatively short amount of time, naturally investors are going to take notice. But before rushing to buy, it’s best to take a closer look at the bull and bear cases for this popular fintech stock.
SoFi’s latest momentum is impressive. Revenue in the second quarter (ended June 30) jumped 37% year over year, coming in at $498 million. And the current customer base of 6.2 million is up 44% from Q2 2022. That’s outstanding growth in its own right, but even more striking given the uncertain economic backdrop. Management even went so far as to raise guidance for the full year. Executives now expect adjusted revenue to be over $2 billion at the midpoint.
With payments on government-backed student loans set to resume after three years of government-initiated pauses put in place due to the coronavirus pandemic, some investors are hoping that SoFi’s business gets a boost. The company’s goal at its founding was to make college easier to afford, and while student loan refinancings have taken a hit, they are poised to bounce back. And that could result in greater revenue.
One of the key stories of 2023 thus far involved concerns early in the year about the solvency of some regional banks, which revealed how unsound a select few banking institutions were. SoFi proved to be a safe haven for investors in the troubled institutions. SoFi’s deposits increased from $7.3 billion at the end of 2022 to $12.7 billion as of June 30. Consumers are voting with their dollars for what they deem to be a safe financial outfit. SoFi’s expanded FDIC insurance coverage has probably helped as well.
There’s an added benefit of a growing deposit base. Because these funds are typically low-cost for a bank, they can become a source of funding for SoFi to expand its net interest margin going forward.
Student loan activity, which used to be a large portion of SoFi’s business, has taken a back seat to personal loans. Personal loan originations have soared. Since the start of 2022, the business has approved $16.5 billion of these loan applications, accounting for 79% of SoFi’s total lending activity during that time. Some investors might argue that this is a sign of a diversified product offering, but I see huge potential risks on the horizon.
SoFi is originating a lot of personal loans at a time when the U.S. economy remains in an uncertain place. If there’s a mild recession (let alone a severe one), then the company could see its losses rise quickly as borrowers struggle to pay back these unsecured loans.
Revenue and customer growth are great to see, but SoFi is still far from being profitable, posting a net loss of $48 million in the latest quarter. To be fair, that was a major improvement from the $96 million loss it reported in the year-ago period. And management said it does expect the company to produce a profit (on a GAAP basis) in Q4. But until the business is generating sustainable profits, there’s always the increased risk of financial troubles should the economy take a turn for the worse.
SoFi has found success by operating a digital-only model, which has worked thanks to the proliferation of the internet and smartphones. But competition in the industry for new customers is incredibly fierce. At the end of the day, this company offers commoditized financial products, making it hard to differentiate between different providers.
While investors can easily justify starting a position in SoFi, I’m hesitant to buy the stock right now. The potential for rising defaults worries me. Moreover, I need to see consistent profits before I even think about adding shares of this fintech specialist to my portfolio.
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