It's been a wonderful year so far for investors, with the Nasdaq Composite Index up about 35% (as of July 13). Some individual stocks have fared much better.
SoFi Technologies (SOFI 2.96%), for example, has roughly doubled this year. However, shares are still more than 60% below their all-time high.
Should investors hop on the bandwagon and buy this popular fintech stock? By considering both the bull and bear arguments, investors will be able to make an informed decision.
SoFi is a budding digital bank
One of the key bull arguments for SoFi centers on its outstanding growth. Revenue in the latest quarter of $472 million was 43% higher than a year ago. The membership base has soared, now totaling 5.7 million. And SoFi's current offerings, ranging from checking and savings accounts to various loan products and credit cards, have helped expand its addressable market.
Management raised its full-year forecast, so the momentum should continue even in an uncertain macro environment.
The regional banking crisis of a few months ago might have scared some investors away from ever owning these types of stocks. But based on deposit flows, SoFi looks like a safe haven to its customers. As of March 31, the business had $10.1 billion of deposits on its balance sheet, up 38% from $7.3 billion as of year-end 2022.
SoFi offers one of the best savings rates on its deposits. And it expanded Federal Deposit Insurance Corp. coverage to protect more than the typical $250,000. I'm sure this attracted customers.
The moratorium on repayment of federal student loans put in place at the start of the pandemic was a major headwind for SoFi, as borrowers didn't have a need to refinance. But with these payments set to resume later this year, bulls argue that refinancing activity could pick up meaningfully. And this would provide a boost to SoFi's business.
NASDAQ: SOFI
Key Data Points
SoFi faces intense competition
There's no doubt that SoFi's growth in recent years is nothing short of spectacular, but banking is an incredibly competitive industry. Consumers have an endless number of options to choose from when it comes to different financial services products. SoFi's digital focus might attract a younger and tech-savvy demographic, but the industry is still dominated by the huge money-center banks.
In essence, SoFi offers commoditized products. That's just the reality. This will make it that much harder to stand out amid heightened competition.
During Q1 2023, SoFi originated $3 billion of personal loans, far more than any loan product it offers. And as of March 31, personal loans accounted for roughly two-thirds of the bank's loan portfolio. These generally have higher interest rates, which can generate greater revenue for SoFi.
But there's also a downside. Personal loans aren't secured by anything, so they carry more risk. With a possible recession on the horizon, SoFi's default rates may be set to rise in the not-too-distant future. This would result in a huge hit to its finances.
Another downside: SoFi isn't profitable. To be fair, the net loss in Q1 of $34 million showed a big improvement from the $110 million loss in the prior-year period. But until positive net income is achieved on a consistent basis, there's heightened risk to the investment thesis.
I'm not a shareholder
Another factor that investors should consider before buying SoFi shares is the valuation. On the one hand, the stock's price-to-book (P/B) ratio of 1.6 is below its historical average of 1.8. But on the other hand, SoFi's P/B multiple is currently double that of online bank Ally Financial's 0.8. This could be either a positive or a negative depending on how investors view things, whether on an absolute basis or a relative basis.
Nonetheless, I'm currently not a SoFi shareholder. I do admire how user-friendly the products are, but that's table stakes as the world becomes more digital. I'm also impressed by its growth.
But the fact that SoFi sells essentially commoditized banking offerings in an industry dominated by much larger peers gives me pause. Additionally, the business still has a way to go before it generates sustainable net income and free cash flow.
This might not be enough to discourage some growth-minded investors, though.
