SoFi Technologies (SOFI -2.06%) hasn't been a winning investment since it entered the public markets in June 2021. Even though shares have climbed 72% higher in 2023 (as of Oct. 9), they are trading 65% below their opening price more than two years ago.
Investors looking to allocate capital to this banking disruptor at a discount should gain a better understanding of the business. Here are three things you need to know if you buy this stock today.
1. Recent trends
It's important to understand how SoFi has performed in light of the higher interest rate environment. To be clear, growth is still a key part of the story with this digital banking firm. In the most recent quarter, revenue increased 37% year over year to total $498 million, with the member count rising by an impressive rate of 44%. These gains are not as sizable as in prior years, but given the uncertain macro backdrop, investors have a lot to be excited about when looking at SoFi's financial numbers.
The executive team is optimistic about the state of things, forecasting positive net income for the fourth quarter this year. And that's not on an adjusted basis, which is what you'll see most companies report to fluff up their numbers. Rather, SoFi expects to reach profitability on a generally accepted accounting principles (GAAP) basis. That would be a major milestone for the business.
2. Competitive landscape
When taking the time to study any business, I think one of the most important things any investor can do is try and better understand the industry landscape. This provides more insights into how a company stacks up against the competition.
The banking industry couldn't be any more competitive. Think about this from the customer's perspective. There are virtually an unlimited number of choices when looking at places to open a checking account, take out a mortgage, open up a credit card, or buy stocks. Well-known institutions like Bank of America, Wells Fargo, Capital One, and Charles Schwab, to name a few, provide these services. Then there are more niche fintech companies like Robinhood or Block trying to draw in consumers with tech-enabled products.
To its credit, SoFi tries to differentiate itself with a purely digital focus, as there are no physical bank branches. By operating only online from the start, SoFi has developed a strong brand in the financial services space. Creating easy-to-use products and a superior customer experience go a long way in an outdated industry.
And it targets a higher-income demographic group. This benefits SoFi because wealthier people might have a higher need for financial services than do those with lower incomes, due to their situations being a bit more advanced and complex. And this can lead to better revenue potential over the long term.
3. Analyzing the loan book
There's been a lot of talk lately about the resumption of student loan payments and how that would affect the economic picture. In SoFi's case, it stands to benefit as this could result in more borrowers refinancing their loans. And this could lead to greater revenue potential, something management might be looking for given that student loans only accounted for 12% of all lending activity so far in 2023.
The major driver of loan originations has been personal loans, totaling $6.7 billion of originations through the first six months of 2023. Even in 2022, these loans drove a major chunk of lending activity for SoFi. While there might not be anything to worry about just yet, investors need to keep a watchful eye on increased default rates going forward, especially if the economy weakens.
Home loans are a much smaller part of the business. In April, SoFi acquired Wyndham Capital Mortgage to bolster its position in this market. But high mortgage rates are discouraging borrowers from taking out these loans to purchase homes. In a more favorable economic environment, this could start to have more of an influence on business results.
By having a better grasp of recent trends impacting SoFi, as well as its competition and loan book, investors should now be better informed about this digital banking business.
