SoFi Technologies (SOFI -1.70%) hit the public markets firing on all cylinders. The fintech start-up joined the stock market during the height of the pandemic bubble, going public through a special purpose acquisition company. It then went on an acquisition spree, buying fintech software and a consumer bank to increase the number of financial products it could offer consumers.
After hitting $25 a share in short order, SoFi has trended lower in recent years along with most other fintech stocks. Today, its shares are still off 65% from all-time highs. But if you look at the underlying business, it's growing like gangbusters and attracting tons of depositors, giving the company the wherewithal to make new loans. Does that make the fintech start-up a buy at these depressed prices? Let's investigate.
From student loans to consumer banking
SoFi began by refinancing student loans, and it still operates a student loan business, but it has added a plethora of other financial services. These include personal loans, mortgages, investing services, credit cards, and personal-finance help all in a single mobile application.
The key event for the company was its acquisition of Golden Pacific Bancorp in early 2022, which gave it a consumer banking license. Now, SoFi can operate like a traditional bank, taking in deposits and using them to make loans.
But unlike traditional banks, SoFi has no physical branches and it has much lower overhead, allowing it to offer much higher interest rates on deposits compared to legacy institutions. Today, it is paying a 4.5% interest rate on deposits, compared to close to zero for megabanks.
It is no surprise, then, to see its customer base growing impressively. It now has 6.2 million members, about six times the number in the first quarter of 2020.
Growing quickly, but unprofitable
Along with rapid customer growth, SoFi has increased its deposit base. At the end of the last quarter, it had $12.7 billion in total deposits on its balance sheet, up from $7.34 billion at the end of 2022 and just $1.15 billion at the end of the first quarter of 2022. Revenue growth has followed suit, up 171% since the company went public.
The question is not whether SoFi can grow, it's whether it can ever do so while generating a profit. The company has failed to generate a profit over a 12-month period since going public, and it had a net loss of $196 million during the past 12 months.
Bears will point to this as evidence SoFi is operating unsustainably by paying out high interest rates to depositors, making risky personal loans, and spending boatloads on marketing expenses. During the first six months of 2023, the company spent $358 million on sales and marketing, or 37% of its overall revenue.
Bulls will point to the rapid growth of depositors and SoFi's revenue as signs these investments are worth it. I tend to lean toward the bulls being right, but shareholders need to realize that the company is being very aggressive in trying to attract customers and has never proved it can generate a bottom-line profit.
This is why book value per share, the most important metric for a consumer bank, has actually fallen slightly in recent quarters even with depositors skyrocketing.
Data source: YCharts
One big risk to watch
If SoFi can keep quickly adding deposits and increasing revenue, the stock will likely do fine from these depressed levels. The business should have no problem generating a profit as long as marketing expenses come down as a percentage of revenue at scale. The company generated more than $527 million in net interest income through the first six months of this year and could start generating billions on an annual basis within a few years' time.
The biggest risk for the business could be the quality of loans on its balance sheet. During the student-loan repayment moratorium, SoFi pivoted into personal-finance loans in a big way, especially after getting its bank charter. In 2021, it originated $5.4 billion in personal loans, $9.77 billion in 2022, and close to $4 billion in each of the first two quarters in 2023.
Because the company is just getting into personal loans, it makes me nervous to see the loans on its balance sheet grow at a rapid rate with the risk of potentially poor underwriting standards.
SoFi Technologies has a good chance to put up explosive returns for shareholders this decade, but it does not come without downside risks. Investors should realize this and size their positions in the stock accordingly.
