The past year has been absolutely brutal for investors. But for SoFi Technologies (SOFI -0.56%) shareholders, the pain goes back even further; the company's stock peaked way back in February 2021. At recent prices, it's down 80% from those highs, while the S&P 500 is down about 1.5% in total returns. 

And it's down for a reason. Between a market that became pretty exuberant about the prospects of fintech stocks, the loss of that conviction, and more recently the macroeconomic pressures (read: rampant inflation and skyrocketing interest rates threatening the economy), its near-term prospects have taken a major hit.

But despite those near-term pressures, and the very real risks they create, there's still a compelling bull thesis, at least for investors who can handle the very real risk of losses if things don't pan out. 

SoFi's future as a bank and the risks

Over the past few years, investor interest in fintechs has climbed up -- and back down -- a mountain. Today, it's at a relatively low point. The same thing has happened for bank stocks, as investors see the positive of rising interest rates not being enough to offset the risks of a potential recession.

And this makes sense because banks are very leveraged businesses, lending about 90% of the cash that depositors put into accounts. As a result, when recessions happen, people lose jobs, have their hours cut at work, and otherwise have to tighten their belts -- leading to increased late payments and loan defaults. And that means big losses for banks that haven't done a good job underwriting high-quality loans. 

The risks are potentially higher for SoFi than for many other banks. That's because the bulk of its loan originations are personal loans, which are typically unsecured. This means that, unlike a mortgage or auto loan, there is no collateral the bank can foreclose upon or repossess if the borrower defaults on the loan. While it has made home loans a bigger priority, the collapse in mortgage activity has caused mortgage volume to slow. 

As a result, SoFi has more than $7 billion in unsecured loans on its balance sheet. That's almost 91% of its total loan book at the end of the second quarter (it had not filed its third-quarter 10-Q at the time of publication). Those loans represent both a significant amount of interest income, but also a not-small amount of risk if we do fall into a serious recession that results in significant job losses. The kinds of loans SoFi specializes in are the riskiest kinds for a bank to hold on its balance sheet. 

The bull case for SoFi

SoFi has taken more control over its future by acquiring a bank recently, giving it a banking charter. As a result, it no longer has to partner with a chartered bank, which means that it has better costs and more control over banking relationships and how it can leverage things like yields on deposits to acquire customers. It's also growing the number of financial services and lending products it offers. 

As a result, SoFi is absolutely growing like wildfire. It increased members by 61% last quarter, products used by 69%, and adjusted revenue by 51%. Maybe most importantly in the current environment, revenue from financial-services products was up 83%, growing much faster than its 24% increase in lending products revenue. 

In other words, SoFi, while still pretty leveraged to those unsecured loans, is steadily diversifying where its revenue comes from. That's a really positive sign, especially the fact that the number of products members use is increasing even faster than member growth.

The risk in the near term is that it will have to live off of its balance sheet, as it continues to spend money to take market share and grow. This situation could be compounded if defaults increase, wiping out book value. 

Risk, reward, and getting through the cycle

While not a perfect metric, SoFi trades for about 86% of its book value at recent prices. Buying a bank for less than book value can often deliver wonderful returns, especially if the buyer can grow that book value. 

Here's the catch: SoFi is burning capital as it spends to take share and grow. Moreover, if we do see a recession, loan defaults would further deteriorate its book value. In other words, this could prove a value trap, and investors should proceed with that firmly in mind. 

SoFi's balance sheet appears to be strong enough to get it through a downturn relatively unscathed, and that makes the risk-reward profile very attractive at this price. It's growing customers by upward of 60% per year and revenue above 50% right now, and its customers are steadily doing more business with it. For investors who can stomach owning a bank through a potential recession, SoFi could prove a very big winner on the other side.