SoFi Technologies' (SOFI -10.23%) roots are largely in the student loan refinancing market. But the company's become much more than that since its 2011 founding. Personal and mortgage loans, investment services, banking, credit cards, and insurance are all now part of its repertoire.
And this lateral expansion begs one key question for prospective shareholders: Where does the company make its money these days? A simple chart provides a surprising answer, for better and worse.
It's still mostly a loan provider
Fintech outfit SoFi -- short for Social Finance -- was launched over a decade ago to help recent graduates get a handle on their student loans by refinancing them on more manageable terms. The company also personally connects these borrowers with their school's alumni, who provide the capital for these refinanced loans.
Such an app is readily expanded into other areas of peoples' financial lives, of course. Not only are most recent college graduates typically tech savvy, but like almost all consumers, they'll also eventually need more money-related services like home loans and checking accounts. It makes sense to procure these offerings from a familiar name.
But where is SoFi Technologies since launching a mobile mortgage offering in 2015, unveiling crypto-trading tools in 2019, and forging a debit and credit card partnership with Mastercard in 2020? The graphic below tells the tale. As of last quarter, a little more than 70% of SoFi's revenue still comes from its lending business.
Data source: SoFi Technologies. Image source: Motley Fool.
There are three important footnotes to add to the image.
First, in the third quarter, 80% of the money lent out was lent out in the form of a personal loan rather than as a student loan or mortgage loan. That's a big shift away from student loan originations, which made up the bulk of new loans as recently as 2020, before the student loan repayment moratorium was imposed. Mortgages only accounted for 6% of the loan portfolio's growth during Q3, perhaps at least partially crimped by soaring interest rates and a struggling real estate market. Student loans of course make up the remaining 13% of SoFi Technologies' total loans originating in the third quarter.
The second footnote? Despite an economic headwind, the total value of loan originations was still up 2% in the third quarter, helping drive that 38% improvement in net loan revenue on the company's $11.2 billion loan portfolio. That's more than twice the $4.8 billion loan portfolio on SoFi's books just a year earlier.
And third, bear in mind that while revenue doesn't inherently translate into profits, in this case it actually does more or less illustrate where SoFi's earnings are coming from. Lending added $180.6 million to Q3's total operating bottom line, versus the technology platform's mere $19.5 million in operational profits. Financial services like checking accounts and investing actually cost SoFi $52.6 million last quarter, extending a long streak of growing losses for this particular arm.
SoFi shares are down for mostly misunderstood reasons
None of this is to suggest SoFi Technologies is wasting time and resources by developing businesses outside of its core lending operation. It can take time to build a new, highly profitable business in competitive markets. It's also arguable that offering some services at a loss keeps certain customers paying for more profitable offerings like loans.
Make no mistake, though. SoFi remains predominantly a lender, in terms of revenue as well as earnings. That's the lens you need to look through first and foremost as you weigh the company's risks and prospects.
And it's a particularly important detail in light of increasingly volatile (but mostly higher) interest rates while the world is toying with a recession. See, higher interest rates generally translate into more profitable loans. Higher interest rates in the midst of economic weakness, however, often make tough-to-repay loans even more difficult to repay.
So far this dynamic's not proven a major problem for SoFi, which may be a reflection of soaring interest in personal loans in this unique economic environment where employment is solid and the economy is reasonably healthy, but the cost of living is high and the fiscal echoes of pandemic shutdowns are still ringing. These loans can usually be made quickly and easily with comparatively attractive terms, and SoFi Technologies has the ability and willingness to offer them.
Of course, current and would-be investors will want to keep their finger on the pulse of the company's personal loan portfolio's health, as well as its student loan portfolio's once the moratorium ends.
Bottom line? SoFi shares have been relatively poor performers this year, mostly on fears the company would suffer weakness across the entire gambit of its services including its lending business. It doesn't do a whole lot of business outside of lending, however, and so far its lending business is holding up pretty well. Given this backdrop, the stock's 2022 weakness is arguably a great buying opportunity for true long-term investors.
