SoFi Technologies (SOFI 3.69%) has been on a wonderful run this year, up 111% as of Dec. 22. That's an impressive gain, especially given the higher interest rates we've seen in the United States.
Are the strong returns set to continue in 2024? There are valid reasons for investors to buy this digital bank stock as we look toward the New Year, but there are also factors that might turn you away.
Let's look at the positive and negative arguments for investing in SoFi.
Providing a better experience
SoFi offers a range of financial-services products. Its focus on providing a superior experience is a good strategy in the banking industry, which has long been ripe for younger rivals to challenge the incumbents with simple and innovative solutions. One thing that makes it stand out is that it embraces an online-only model. It has no physical branches.
Growth has been impressive and continues to shine. Through the first nine months of 2023, net revenue was up 35% year over year. Posting this kind of gain is remarkable when the federal funds rate is at a level it unseen in 22 years.
A clear indicator of SoFi's success in what was a turbulent year in the industry is its deposit growth. The regional banking crisis in March made consumers question whether their money was safe with their banks, and SoFi appeared to benefit from that turbulence, as its current deposits are more than double what they were at the end of last year. Having a digital-first focus helps make it easy for customers to move money around, and expanded FDIC insurance up to $2 million attracted savers to the platform.
A key part of SoFi's strategy is to target not just high-income customers but also younger ones, thus setting itself up to build lifelong banking relationships that can become lucrative over time. Someone who might start off with a student loan, for example, might eventually open up a credit card with SoFi, and then take out a mortgage.
Risk factors to keep in mind
SoFi is an early-stage company, with about 12 years of operational history, so it's hard to say it's developed any sort of economic moat. Its digital-only focus has proved to be an advantage and has resulted in tremendous growth, but because competition in the banking industry is so intense, I don't think SoFi is completely safe. We've seen all the major financial institutions invest heavily in their tech and digital capabilities, and that will only make things more difficult for SoFi.
To SoFi's credit, the fact that it's slowly building relationships with younger consumers creates the potential for a moat. As young customers grow wealthier and their financial needs expand, they might become more dependent on SoFi's offerings, which would create switching costs. That's something to pay attention to in the years ahead.
The management team is expecting SoFi to generate its first GAAP profit in the current quarter. That would be a huge milestone, as it indicates a financial turning point and progress toward sustainability.
However, the lack of a long and consistent track record of positive net income could be viewed as a red flag. Especially if a recession looms on the horizon, SoFi might be overly exposed. As of Sept. 30, 69% of its loan book was represented by personal loans. That's risky, because defaults could rise if a lot of borrowers find themselves in a pinch.
Overall, while it's good to know the risks here, I think the positive things about SoFi hold a lot of weight, so I don't think it's a bad idea to start a tiny position in the stock.
