SoFi Technologies (SOFI 1.02%) has been kind to its investors. In the past 12 months, shares have more than doubled.
The fintech stock still trades 38% below its peak from February 2021. And when you look at the latest financial results, there are reasons investors should be optimistic.
However, the smartest investors know there's one top risk facing SoFi stock.
Lending change
SoFi was founded in 2011, with an early focus on refinancing student loans. Management's main goal was to help students pay for their education. It's no surprise, then, that student loans were the company's bread-and-butter lending product.
At the end of 2019, 59% of SoFi's lending book consisted of student loans. But when the COVID-19 pandemic hit, the government paused payments and interest on federal loans, which disincentivized borrowers to refinance their debt. The result was a complete shift in lending activity for the business, although the pause ended in late 2023.
From the start of 2021 through the end of 2024, SoFi originated a whopping $46.6 billion in personal loans, much more than the $12.9 billion in student loans it approved during the same four-year period. As of Dec. 31, 2024, personal loans made up 64% of the loan book.
Personal loans are inherently riskier than student loans and home loans (the other lending product SoFi offers). This is demonstrated by the weighted average coupon rate of 13.4% the company earns on them, highlighting heightened credit risk. Indeed, the average annual default rate of 4.5% is more than six times that of student loans.
There are two ways to think about the risk that more personal loan activity poses. First, consider that personal loans are used for various things, like debt consolidation, paying other bills, or, as the name suggests, handling other personal expenses. This could be a sign that these consumers are already in a troubled financial position.
Another thing to worry about is what might happen in an economic downturn. Since personal loans are generally unsecured, lenders have no collateral to go after in case of a default. This could lead to greater losses that hit SoFi's financials.
SoFi's target audience
Despite the risk of more personal lending activity in recent years, SoFi is successfully managing this downside factor. It all comes down to the company's target customer base, which consists of a more affluent demographic.
According to CFO Chris Lapointe, the average income and FICO score of a SoFi personal loan borrower are $158,000 and 744, respectively. These are way above the average figures for all U.S. adults, which means SoFi's risk is somewhat mitigated. These people are in better financial shape to make timely payments on their debt, which will hopefully hold true in softer economic conditions.
Keep SoFi on the watchlist
Lending is a tough business that requires leadership teams to balance two opposing forces. On the one hand, approving more borrowers means more revenue potential. On the other hand, approving anyone means increased default risk. It's all about managing the two sides in an effort to control risk and boost sales.
SoFi has thus far proven that it can achieve this. Revenue and customer growth are superb, both surging more than 25% in 2024. The business is now generating consistent positive net income as well.
I believe investors interested in SoFi should keep it on the watchlist for now. As of this writing (Jan. 27, 2025), shares trade at a price-to-sales ratio of 6.8, which is 111% higher than just six months ago. The valuation looks too rich, so investors should be patient.
