What happened

Shares of online bank and financial services provider SoFi Technologies (SOFI -0.28%) are down 64% since the bear market began in earnest on the first trading day of last year. But its stock price decline actually started a full year earlier, when it was announced on Jan. 7, 2021 that SoFi would be going public via a SPAC merger. The stock price of the blank check company that would become SoFi peaked on Feb. 1; shares are down a brutal 78% since then while the S&P 500 is up about 9% in total returns. 

That's a painful combination of both losses and lost opportunity. 

So what

SoFi's stock sell-off is the product of a number of things. First is the gorilla in the room that was the combination of the explosion in the number of companies that went public via SPAC riding that massive wave of investor exuberance, leading to extreme valuations that have since washed out and cost investors billions in losses.

But that's only part of the story for SoFi. The more worrying part for the company itself is its large exposure to student loans; uncertainty around the future of student loan debt and the extended moratorium on loan payments during and after the coronavirus pandemic has led to consternation about what had been a bit of a cash cow for the company. At the same time, SoFi has diversified, increasing its exposure to unsecured personal loans that now make up almost 61% of its total loan portfolio at the end of the third quarter.  

These are some of the higher-risk loans a bank can have on its balance sheet. The upside is they earn a much higher interest yield than secured debt like mortgages, but the downside is there's no collateral. And if we do fall into a steep recession, these are the kinds of loans borrowers tend to default on first. 

The business model and risk profile for SoFi has also changed since it went public. SoFi acquired Golden Pacific Bancorp last February, a move that should strengthen its competitive positioning going forward, but it also means it is less of an investment in the future of fintech and more the future of banking. 

Now what

Mr. Market isn't just down on high-growth fintech and SPAC stocks; the banking sector is down about 23% from the highs, while shares of banking giant Bank of America are down 31%. Shares of Capital One Financial, which carries a significant amount of credit card loans (also unsecured, higher-risk debt) are down 36% from the high. 

In other words, investors see the risks a possible recession creates for banks, and are pricing that risk in. For SoFi, that means the risk of being a bank is offsetting what the market thinks its more asset-light fintech business could be worth. At recent prices, it trades for around 1 times book value, compared to 0.78 times book value for Capital One, and 1.1 times book for Bank of America. And while those bigger peers are also solidly profitable and cash-positive, SoFi has been in full-on growth mode, consuming cash, further compounding the risk and making the book value metric less reliable as an indicator of value. 

Put it all together, and SoFi is best described as a risk-reward investment today. If a steep recession leads to defaults on its unsecured debt, SoFi doesn't have the kind of balance sheet strength and diverse loan portfolio that most banks do, and that could mean big losses that affect its ability to invest in continued growth. But if management successfully navigates the economic environment in the near term, and its loan book holds up, investors who buy at these prices could have a massive winner on their hands.