Is SoFi Stock a Buy?

With the banking industry still generally being seen in a negative light, investors might want to avoid these types of stocks altogether. SoFi Technologies (SOFI -0.13%), a new-age digital financial services company, is up 28% this year (as of April 18), so investors haven't completely written off the sector. However, its shares are still down 77% off their peak, so they have a lot of work to do to claw back those meaningful losses. 

Is SoFi stock a buy right now? Let's examine the bull and bear cases for this popular fintech business to find the answer. 

Reasons to buy 

One of the most compelling reasons to own SoFi shares is how it stands out amid the troubling banking turmoil that started about a month ago. As of Dec. 31, 91% of SoFi's deposits are FDIC-insured, which should ease the concerns of investors and customers. What's more, SoFi recently introduced a program that offers FDIC insurance on up to $2 million by spreading out deposits at partner banks. 

On the asset side of the balance sheet, SoFi is also somewhat protected from the rapid rise in interest rates. As of Dec. 31, nearly all of the company's loan portfolio is in personal loans and student loans, which tend to be of much shorter duration than the long-dated Treasuries that have plagued some other regional banks. 

Bullish investors will also be attracted to SoFi's rapid growth over the years. Total revenue more than tripled from 2019 to 2022. And during that time, the business increased its member base from under 1 million to over 5.2 million at the end of last year. SoFi can help drive further gains by introducing new products and features in order to become a fully digital one-stop financial service provider. For 2023, management expects adjusted revenue to jump 25% to 30%. 

With the stock down 77% from its all-time high, SoFi's valuation doesn't look too demanding right now. Shares trade at a price-to-sales multiple of 3.4. This is close to the cheapest the stock has sold for in its entire public history. A lower valuation means greater upside, all else being equal. 

Reasons to sell 

Despite the outstanding growth that SoFi has registered over the years, this business has yet to turn a profit. This makes sense, given that management has been entirely focused on expansion by introducing new products and trying to gain customers quickly. With any growth business, the promise is always that net income will come at some point in the future once a certain level of scale is reached. But there is still a lot of execution risk for SoFi before it can get to that point. To its credit, its net loss did shrink in 2022 compared to 2021. This might be an encouraging sign for shareholders, but it still represents a loss. 

Another factor worth mentioning as a reason to hesitate before buying the stock is the ridiculous amount of competition in the financial services industry. SoFi offers a wide range of products and services, like credit cards, brokerage accounts, insurance, and banking services. But an endless number of other financial services businesses out there can offer the same things. This means a valid argument can be made that SoFi essentially sells commoditized products. 

And lastly, at its core, SoFi is still a bank, even though it might present itself as more of a technology enterprise. This fully exposes the business to macroeconomic factors, particularly when it comes to the trajectory of interest rates, which are outside its control. In good times, credit is loose and demand from borrowers is robust. But in recessionary periods, the opposite is true, with tighter capital markets and less loan demand. This cyclicality is something that investors might be OK with. The issue, though, is that SoFi hasn't dealt with a full-on economic downturn (besides the quick pandemic-fueled one in 2020) in its history. 

Financial institutions are inherently complex organizations with opaque operations and hidden risks that are hard to fully comprehend. So there's no way to know how the company would handle a recession.

The reasons to sell hold more weight right now than the reasons to buy, in my opinion. And for that reason, I'm staying away from SoFi stock for the time being.