SoFi Technologies (SOFI -9.79%) hasn't had a great year thus far. Its shares are currently down 23% in 2024 (as of April 8). That's not encouraging, particularly when the Nasdaq Composite Index is up 8%.
But this fintech stock has climbed 66% since the start of 2023. And some investors might be warming up to the idea of owning a growth-focused digital bank in their portfolios with the hopes of achieving market-beating returns over the long term.
Before you consider buying SoFi stock, you should understand what might be the company's biggest risk right now.
What happens in a downturn?
Since the start of 2022, SoFi originated $24 billion of personal loans. This figure represented about 85% of the company's total loan originations during this time. Prior to this point, student loans were a big driver. But because of the government's pause on payments during and after the worst of the coronavirus pandemic, SoFi has been seeing less activity in this area.
As of Dec. 31, 70% of SoFi's lending book consists of personal loans. These are typically unsecured products that carry higher interest rates and greater credit risk. Consumers can also use these loans for a variety of purposes.
The fear is that if a recession happens, this business could see defaults rise. People who feel pinched might be forced to direct more of their monthly budgets to essential purchases, like food, gas, and rent. And this could result in a situation of missed payments and delinquencies. In this scenario, SoFi could reverse course from the profit it posted in Q4 and begin reporting net losses.
Is the stock still a buy?
It's probably never good to see such big exposure to a single product line for any bank. Despite this trend, I still believe SoFi makes for a smart investment today.
Given that student loan repayments have resumed, this area could start to pick up steam in the near term. And SoFi could start to originate more student loans again or see stronger refinance activity, getting back to its roots where it has expertise. And this will introduce more diversity to SoFi's operations.
It's also worth pointing out who SoFi's core customers are: those with higher incomes. "Our personal loan borrowers' weighted average income is $171,000, with a weighted average FICO score of 744," said CFO Christopher Lapointe, on the Q4 2023 earnings call. This somewhat mitigates the risk of rising defaults in a recessionary scenario, but it doesn't completely eliminate it.
Nonetheless, SoFi deserves a closer look from investors. For starters, growth is outstanding. Ongoing macro headwinds didn't prevent the business from reporting a year-over-year revenue and customer gain of 35% and 44%, respectively, in the fourth quarter.
SoFi's products are really resonating with consumers who seek a better user experience. The business has found success in the extremely competitive banking industry by leaning into a tech-first focus to better serve customers.
After years of consistent losses, management is optimistic that SoFi has turned the financial corner. For all of 2023, the business reported a net loss of $301 million. But after posting a profit in Q4, over the next several years, executives believe SoFi's earnings will skyrocket, from a $0.36 loss per share in 2023 to a $0.68 profit (at the midpoint) in 2026, before increasing more than 20% thereafter. By not operating any physical bank branches, SoFi looks like it's starting to benefit from scale advantages, as its expenses should increase at a slower pace than revenue going forward.
As of this writing, shares trade 70% below their peak price, which was hit in early 2021. Consequently, the stock isn't expensive, selling at a historically cheap price-to-sales ratio of 3.4. Should earnings trend in the right direction, as the leadership team hopes they will, SoFi could be a big winner for investors, even considering the key risk mentioned.
