During the last three months of 2023, SoFi Technologies (SOFI 3.69%) reported better-than-expected financial results, which the market immediately cheered on right after the news. But despite strong momentum boosting the business, this fintech stock still trades 70% below its peak price (as of Feb. 1).
You might be thinking now would be a good time to add this beaten-down company to your portfolio. But before you rush to buy SoFi shares today, here are three things you need to know.
Financial milestone
The trend of impressive growth for SoFi continued last year. It reported revenue of $2.1 billion, which was up 35% versus 2022. The customer base now stands at 7.5 million, rising 44% year over year. Getting more consumers to sign up for one of the company's numerous financial or lending products is the name of the game.
But I think what really stood out when looking at SoFi's latest results was that the business has finally turned the financial corner. During the fourth quarter, SoFi posted net income of $48 million (on a generally accepted accounting principles (GAAP) basis). Investors can be encouraged by the fact that management delivered on this forecast.
The hope is that SoFi won't sacrifice growth going forward. That doesn't seem to be the case. Executives see revenue increasing by 20% to 25% per year on average over the next few years. By 2026, they expect earnings per share to come in between $0.55 and $0.80.
We might now be seeing SoFi enter a new phase in its lifecycle where it becomes a sustainable business that can start generating lots of profits and free cash flow.
Growing personal loans
SoFi has long been known for its student loan refinancing product, but over the last few years, personal loans have driven lending activity. In fact, since the start of 2021, personal loans have comprised about 67% of SoFi's loan originations. And as of Dec. 31, they represented 67% of all the loans on the balance sheet.
On the one hand, personal loans provide a boost when it comes to interest income, as they have an average coupon of 13.8% for SoFi. However, because they are unsecured, there is a higher risk of default. If the economy takes a turn for the worse, borrowers might stop making payments on these loans first. The losses for SoFi in this unfavorable scenario will probably rise meaningfully, even though the borrowers are of better credit quality.
The resumption of student loan payments might be beneficial for the business. An estimated 40% of borrowers missed their first payments last October, which might prompt consumers to turn to refinancing options. And this could result in greater revenue for SoFi.
"Student loan originations grew 95% year-over-year to $790 million," said CEO Anthony Noto about the last quarter.
Still a bank
SoFi deserves a lot of credit for being an innovative and disruptive trailblazer in the banking industry. The company has posted remarkable growth demonstrative of a tech business, which is admirable. But at the end of the day, this is still a bank. And that means there are some factors that SoFi just can't avoid.
Banks are typically very cyclical enterprises. And that's because they are heavily influenced by changes in interest rates, which are totally outside their control. Lower interest rates and looser monetary policy generally lead to strong demand from borrowers. On the flip side, higher rates and tighter monetary policy -- what we've seen over the past couple of years -- result in tighter lending standards and subdued interest from borrowers to take out loans.
This means that SoFi, no matter how impressive its growth has been, will always be exposed to the whims of broader macroeconomic factors. Nonetheless, SoFi is still a stock that should be on your investing radar. I believe there's a lot more to like than dislike when we look at this business.
