Since hitting an all-time high of $25.78 in February 2021, shares of SoFi Technologies (SOFI 3.71%) have cratered 71%. But things improved last year in a major way, as the stock skyrocketed 116% in 2023.
Investors are probably looking to ride the momentum to strong portfolio returns going forward. And they might be even more encouraged to learn about a little-known statistic that could boost this business.
Let's take a closer look at this fintech stock and why it could be a no-brainer buy in 2024.
Resuming payments
To alleviate the financial burden for consumers during the coronavirus pandemic, the Department of Education put a pause on student loan payments and the accrual of interest. But late last year, this moratorium ended, and borrowers were required to start making payments.
In a troubling sign, data showed that 40% of these borrowers missed their first payments in October. This is worrying because after about three years of no obligations, consumers still look to be in poor financial shape. Not to mention the fact that there's a total of nearly $1.8 trillion of outstanding student loan debt in the U.S.
This situation might drive these consumers, who have already been dealing with inflationary pressures and higher interest rates, to turn to refinancing options to make payments more manageable. This could help them at least start chipping away at their student loan balances.
NASDAQ: SOFI
Key Data Points
Going back to its roots
Here's where SoFi comes into the picture. The digital bank was founded in 2011 with a focus on making education more affordable for students. Consequently, student loans were its most important lending product. With the possibility of more borrowers looking to refinance, this could lead to strong loan growth for SoFi, which specializes in this product. And this could result in higher revenue from origination fees and interest payments.
That isn't to say SoFi hasn't been growing rapidly in recent times. Revenue in the third quarter of 2023 (ended Sept. 30) was up 27% year over year, with the membership base rising 47% to total 7 million today.
But investors might want to temper their expectations. The management team, led by CEO Anthony Noto, does not expect student loan originations to pick up immediately in any meaningful way, instead exhibiting a "slow, steady climb."
Noto mentioned that student loan activity for the business will be driven less by demand and more by which customers SoFi decides to approve based on its risk management and credit assessment frameworks. This is exactly what investors should want to hear, as it signals that SoFi is adopting a prudent approach.
Don't forget the downside
On the one hand, the fact that SoFi now has a potentially larger pool of customers looking to adjust their student loan situations can be viewed as a positive factor. Even with careful lending standards, having a favorable backdrop like that can be beneficial.
But there are also risks to keep in mind. Seeing 40% of borrowers miss their first payment might be indicative of broader economic weakness. If a recession happens in the U.S. sometime in 2024, it's reasonable to expect more consumers to miss their payments as they prioritize spending on more essential items.
And since the start of 2022, the vast majority of SoFi's lending activity has been represented by personal loans. These are typically unsecured products that carry greater financial risk than secured loans. And as of Sept. 30, about 70% of SoFi's loan book consists of these personal loans.
To its credit, SoFi continues to post solid financial results. But despite the potential for student loan originations to pick up in the near term, investors should be mindful of the downside risk before deciding to buy the stock.
