SoFi Technologies (SOFI 6.89%) has been a fantastic place for investors to put their money over the past few years. The company's ability to attract new customers and stand out among rivals in a highly competitive fintech market has caused SoFi's share price to surge 4X over the past three years -- with 250% returns coming in the last year alone.
It's understandable, then, that some investors might assume that buying SoFi stock right away could set them up for life. But while SoFi stock could continue to be a good place to put some money, I don't think it will set investors up for life. Here's why.
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1. Competition is fierce and growing
All companies face serious competition, but I think it's worth mentioning SoFi's because the fintech market is constantly being encroached upon by large tech companies. For instance, Apple has expanded its fintech footprint for years with Apple Pay for digital payments and its Apple Card credit card.
SoFi also has to fend off other non-traditional financial companies like Klarna and PayPal, which offer buy now, pay later services that could eat into SoFi's short-term lending business. If all of that weren't enough, SoFi competes with traditional banks, including Wells Fargo and Bank of America, when it comes to business loans and bank accounts.
While SoFi has managed these challenges well, the company doesn't have a competitive moat that sets it apart from its rivals. That means there's nothing specifically unique about what SoFi does that will keep its customers from leaving the company for a competitor in the future.
2. SoFi's gains have come at a time of mass optimism in the market
Let me say first that SoFi's membership growth, increasing sales, and rising earnings over the past several years have been impressive. For example, in the most recent quarter, SoFi's revenue rose 44% from the year-ago quarter to $858 million, non-GAAP earnings jumped 700% to $0.08 per share, and the company added 850,000 new members, a 34% increase.
SoFi deserves credit for all of this. Still, I think that at least part of its impressive share price gains occurred because investors are optimistic about stocks in general right now. Consider that the S&P 500 is up nearly 80% over the past three years, giving it annualized gains of about 21% -- more than double the index's annual historic average.
SoFi's rapid share price increase has pushed the stock's price-to-earnings ratio up to 56, making it more expensive than the broader market -- the S&P 500 index has a P/E ratio of about 30. That also means SoFi's stock is priced for perfection, making it harder for the stock to return substantial gains if the company fails to meet investors' lofty expectations.
3. The economy is uncertain
I think it's also important to highlight that SoFi's strong growth and rising share price have come at a time when the economy has been strong. Unfortunately, there are some signs that things may be slowing down.
Bureau of Labor Statistics data shows that just 22,000 jobs were added last month, far below economists' estimates of 75,000, and it comes on the heels of a decline of 13,000 jobs in June. Unemployment also rose to 4.3% recently, its highest level since 2021.
There are a lot of moving parts that contribute to the economy's health, making it notoriously difficult to predict what will happen, but a slowing job environment clearly isn't a good indicator. If hiring stalls further, or tariffs cause consumers to cut back on spending, economic growth could slow down. Since SoFi depends on customers taking out loans, repaying them, and borrowing money, any slowdown could cause SoFi's top and bottom lines to feel the pinch.
Verdict: SoFi won't set you up for life
I think SoFi could be a good long-term investment, but don't expect the stock to set you up for life. The astronomical gains SoFi's stock has made over the past few years have been the result of its growth, a strong economy, and generally very optimistic sentiment from investors. That means expecting similar returns for the future just isn't realistic.
