In the three-month period that ended Sept. 30, SoFi Technologies (SOFI 3.69%) posted 27% growth in revenue and a 47% rise in its member base. What's more, the leadership team upped its guidance for the full year.
During what has been an uncertain economic period, these developments from SoFi are definitely encouraging. And they might just prompt prospective investors to take a closer look at the shares.
If this fintech stock is on your radar for businesses to potentially buy, first take the time to understand these three things about the digital banking company.
Growth of personal loans
SoFi was founded in 2011 with the primary goal of allowing students to refinance their loans. This sole focus has now blossomed into a full-service banking institution that offers a range of financial products and services to millions of customers.
It's noteworthy that since the start of 2022, SoFi has originated far more personal loans. In fact, in the past seven quarters, the company has approved $20 billion worth of personal loans compared to just $4.1 billion of student loans. And on the balance sheet (as of Sept. 30), 69% of the loan book is comprised of personal loans.
On the earnings call, management points to how these borrowers have strong credit scores and high annual incomes. However, personal loans are generally unsecured. And if times get tough, like in a severe recessionary scenario, consumers might stop making payments on these. The result would be heightened defaults for SoFi.
While investors shouldn't worry just yet, this is definitely something to keep an eye on in the coming quarters.
GAAP profitability
Most high-growth businesses, especially those in the fintech industry, aren't even close to reaching profitability. Financial resources are plowed back into expansion opportunities, with the hope that net income can be achieved far into the future.
SoFi is unique in that it's about to turn the corner from a financial perspective. The leadership team, led by CEO Anthony Noto, said the company will produce positive profit under generally accepted accounting principles (GAAP) in the current quarter for the first time. This would be a huge milestone for a business that lost $320 million in 2022.
While it's easy to give SoFi lots of credit right now, generating positive net income in one quarter isn't necessarily a huge deal in the grand scheme of things. It's critical to watch this metric closely going forward. Obviously, the hope is for SoFi to consistently produce profits. Should it be able to do this, while at the same time continuing to grow the top line, then there's a lot for investors to be excited about.
Intense competition
SoFi has clearly found remarkable success by creating a digital-only bank that's underpinned by technology and a seamless user experience. The banking industry desperately needs these kinds of disruptors to innovate and find better ways to serve customers.
Even so, the competitive landscape can't be ignored. SoFi goes up against the giants in the industry, like JPMorgan Chase and Bank of America, both of which have long and successful histories. There are smaller, local banks and credit unions providing products SoFi does. Plus, niche providers like Block's Cash App and Robinhood Markets also compete with SoFi in one way or another.
By becoming familiar with these three aspects of SoFi's business, investors looking to buy shares are now better able to make an informed decision. The takeaway is that financial services are a commodity. This means that SoFi will have to constantly be on top of its game to not only keep its existing customers happy, but also to bring on new ones.
