The market has climbed noticeably this year, and some businesses have registered even faster growth. One such enterprise is SoFi (SOFI 3.69%). The digital bank's shares are up 114% in 2023 (as of Dec. 19).
Besides strong financial performance, SoFi is getting back into the investment community's good graces, even though the fintech stock remains 62% off its peak price.
As we look toward the new year, there are reasons to be optimistic about this business. However, there is also one key risk that investors shouldn't ignore. Let's take a closer look at SoFi.
You can't ignore this lending product
Since the start of 2022, SoFi has originated $4.1 billion in student loans. That might seem like a significant amount at first glance, but it only represented under 16% of the company's total lending activity during that time. The pandemic-related student loan moratorium gave borrowers some relief that perhaps led to lower demand for SoFi's refinancing capabilities. But payments have resumed, which could provide a near-term boost to the business.
Nonetheless, in the last seven quarters, SoFi originated about $20.4 billion worth of personal loans, accounting for the vast majority of total lending activity since the start of 2022. This single product now represents 69% of the company's entire loan book, up from 39% at the end of 2019.
"We're seeing unprecedented demand for unsecured personal loans," CEO Anthony Noto said on the Q3 2023 earnings call. Strong demand has been driven by consumers wanting to refinance other debt they might have.
On the one hand, personal loans carry higher interest rates than student or home loans. However, personal loans are riskier for lenders, and they aren't secured by any collateral.
What happens if the economic picture takes a turn for the worse in 2024? The U.S. economy isn't out of the woods yet. The fact that the yield curve has been inverted for about a year and a half is a worrying sign that a recession is on the horizon.
SoFi's management mentioned that the average personal loan customer has an annual income of $167,000 and a FICO score of 744. This alleviates some concerns and provides a bit of downside protection, but even these borrowers wouldn't be immune to a severe economic downturn.
Add in the fact that national credit card debt of $1.1 trillion is at an all-time high, and you can quickly see that, should economic conditions deteriorate, SoFi could see defaults spike. Consumers might place making their monthly payments on personal loans at a lower priority than other more essential spending categories.
If defaults rise, SoFi's earnings would likely take a hit because the business would have to set aside more capital as provisions for loan losses. In the first nine months of 2023, SoFi set aside $43 million for this purpose, up from $39 million in the same period a year earlier.
Investors can't ignore the near-term risk that greater personal loan activity poses for this company.
Reasons to be optimistic about SoFi
For those investors who are rightfully focused on the next several years, SoFi might still make for a worthy investment candidate.
The business is expected to generate positive GAAP net income in the current quarter for the first time ever, which could be the start of a stronger financial position going forward. This is exactly what the bulls want to see, especially for a company that has been fixated so much on growth.
Moreover, there is still a ton of growth potential. SoFi was able to increase revenue and customer count by 27% and 47%, respectively, in the most recent quarter. These gains will likely continue in the foreseeable future, given that SoFi provides a superior customer experience in an industry that has long been ripe for disruption.
