Although its stock is still down about 18% since its initial public offering (IPO) in June 2020, SoFi Technologies (SOFI 3.69%) has had a monster year in 2023. Shares have risen 78% this year alone, as investors have clearly warmed up to the digital bank.
This might prompt some to try to ride the momentum. But there's a lot that investors need to know about SoFi before making an informed investment decision.
So, should you buy the shares today? Let's take a closer look at this fintech stock.
A popular digital bank
SoFi is similar to a traditional bank in that it offers various lending and banking products, as well as credit cards and a brokerage account. The key difference, however, is that the company has no physical offices. All of its services are offered digitally.
The business has posted outstanding growth since its founding in 2011, thanks to the popularity of smartphones and the internet. These underlying technologies help make online banking possible in the first place. As of March 31, SoFi counted 5.7 million members, up a whopping 421% in three years.
An important benefit of a digital-only business model is that it's incredibly easy for customers to access their accounts and move their money around. This was never on display more than in the past several months. The regional banking crisis forced customers to think about where they wanted to place their deposits.
SoFi's deposits increased from $7.3 billion at year-end 2022 to $10.1 billion on March 31, probably spurred by management's decision to launch a program that offers up to $2 million of Federal Deposit Insurance Corp. protection. That looks like a powerful vote of confidence.
Recent trends to know about
During the first three months of 2023, SoFi reported a loss of $0.05 per share, much better than the $0.08 loss that Wall Street analysts were expecting. If that wasn't good enough news, especially when banks are under heavy scrutiny, SoFi's total first-quarter revenue of $472 million was up 43% year over year. That's impressive growth.
But the stock tanked after the earnings announcement because personal-loan originations soared 46% to just under $3 billion in the first quarter versus a year ago. Investors are concerned that if recessionary expectations prove correct, then losses could surge as borrowers struggle to make payments. That is a real potential risk.
The latest debt-ceiling stand-off was also on everyone's mind in recent months, worrying investors that the U.S. government would default on its debt obligations. Default was averted for now, and part of the resolution was legislation that will end the moratorium on student loan payments at the end of August. This was viewed extremely favorably by SoFi shareholders; the stock has skyrocketed in the past few weeks following the news.
It should benefit the fintech because its bread-and-butter business is refinancing student loans. In fact, the company's entire founding was based on trying to help students find better ways to pay their education costs.
So when borrowers have to start repaying their government-backed loans again, after more than a three-year pause, they might turn to SoFi to refinance them to seek better rates and a longer payment period. This is definitely a huge near-term catalyst that investors should pay attention to.
The valuation matters
I mentioned earlier how SoFi has been a terrible investment in recent years. After all, the shares are down 18% since their IPO date. The Nasdaq Composite Index, by comparison, has climbed 12% during this same time. But the stock is on an absolute tear in 2023.
The shares currently trade at a price-to-book (P/B) ratio of 1.5, which is more expensive than they've been for most of the last 12 months. And this P/B is slightly higher than that of JPMorgan Chase, which investors consider to be the gold standard in the banking industry.
SoFi's price doesn't necessarily scream value. But for those investors who care more about growth potential than the current valuation, it might be worth a closer look.
