Warning: Don't Buy SoFi Stock Before You Know This 1 Key Risk


Despite this fintech company’s positive traits, there’s a potential issue investors need to know.

It’s been a rough ride for shareholders of SoFi Technologies (SOFI -0.77%). After a drop of 35% this year (as of July 3), the stock currently trades 75% below its peak. But interested investors can now scoop up shares at a price-to-sales ratio of 2.9, well below their historical average.

Before you buy this fintech stock, though, it’s critical to take the time to understand one important risk factor.

Changing the loan book

Founded in 2011, SoFi originally became known as a digital bank that offered student loan refinancing solutions. However, these days, the business provides numerous other financial services, including checking and savings accounts, a credit card, and investment services. But at its core, SoFi is a lender, and a new type of loan product has become its most important offering.

In the past 12 quarters, it originated $31 billion worth of personal loans, while in its former bread-and-butter business of student loans, it originated just $9 billion.

The temporary pause on student loan interest and repayments that the federal government put in place to help borrowers navigate the pandemic, understandably sapped demand for student loan refinancing. The repayment pause ended in autumn 2023, but in the interim, it shouldn’t be a surprise that SoFi pivoted some of its focus to the personal lending space.

However, this creates a potential problem. Personal loans are unsecured, and they carry higher interest rates. That benefits SoFi in the form of higher interest income, but it undoubtedly makes its balance sheet riskier. In an economic downturn, for example, more of the average consumer’s budget will probably go to essential spending categories like groceries, gas, and rent. More missed payments would lead to losses for SoFi.

Moreover, a valid argument can be made that the rise in personal loan borrowing indicates that the U.S. is already facing economic troubles. With inflation still above the Fed’s 2% target, a trend of corporate layoffs, and record-high credit card debt, borrowers could be leaning on personal loans.

SoFi could see its loan book slowly start to revert toward its previous makeup, though. While personal loans made up 65% of its loan book as of the end of the first quarter, student loan originations soared by 43% year over year in Q1, much faster than the 11% gain for personal loans. Perhaps this trend will continue.

Something that might ease shareholder concerns is that SoFi targets a more affluent customer base. The company’s student loan and personal loan borrowers have incomes that average roughly $150,000, with average FICO scores exceeding 740. This could prove to be a benefit should the economic picture worsen.

Is SoFi stock a buy?

Before an investor decides to buy a stock, it’s extremely important to weigh any notable risk factors. In this instance, how SoFi might perform in an adverse economic scenario is a top concern. This issue is not specific to this company, given that all banks experience cyclicality.

At the end of the day, I still believe SoFi stock is worth considering. The company’s growth is tremendous, with adjusted net revenue and membership surging 26% and 44%, respectively, in Q1. Both of these figures are dramatically higher than they were just a few years ago, demonstrating strong demand for what this fintech offers.

SoFi has now reported two straight quarters of GAAP (generally accepted accounting principles) profitability after consistently posting net losses. Executives believe that in the years ahead, the company’s net income will skyrocket. With the stock trading at a reasonable valuation, this is another reason to scoop up shares.

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.



Source link

About The Author

Scroll to Top