Despite the regional banking crisis that rattled markets and the economy earlier this year, SoFi Technologies has been a well-respected player. This year, its shares are up 68%, even though they have come down significantly since the start of August.
SoFi stock is not only selling at a price-to-sales multiple below their historical average but also because of a near-term catalyst.
Before doing so, though, there's one huge red flag that can't be ignored. We're taking a closer look.
SoFi was established in 2011 with the objective of helping students pay for the rising expenses of college. The company's main product line consisted of refinancing student loans. This has expanded to a wider range of financial services that has created the successful digital bank that we are all familiar with today.
The department of education recently ended its discontinuation on student loan payments, and they are expected to resume in October after being halted following the onset of the coronavirus pandemic. However, the impact of the increased economy may be sizable, but SoFi could be beneficial. While inflation is at its highest levels, with an uncertain economic climate, borrowers may struggle to find the extra income they need to make payments on time. This could be a boon for SoFi. Refinancing activity could boost the company's revenue, resulting in higher revenue.
In the first six months of 2023, net revenue increased 40 percent on a year-over-year basis. The management team expects adjusted net revenue to jump 30% for the full year, reachingGAAP profitability in the fourth quarter. This is already a strong outlook, but it could be underestimating SoFi's prospects should student loan business bounce back nicely.
Since the beginning of 2022, SoFi has originating $16.5 billion worth of a different product, personal loans, that represented almost 80% of the company's overall lending activity in the past six quarters. The total student loan made up just 15 percent of the total, which is the equivalent of a student loan.
On the second quarter of 2023 earnings call, Noto said the growth of personal loans had not yet been achieved.
Investors need to understand a huge risk that is on the horizon. Personal loans can be used for various purposes, such as debt consolidation, funeral expenses, or medical expenses, while student loans have only one purpose. While the economy has shown its resilience, there is still the possibility of a recession. Investors should be careful if the recent financial results from major retailers such as Costco, Home Depot, and Target are anything to go by. At these companies, sales growth is slowing significantly.
This means that there is a possibility that defaults on these personal loans, which made up 69% of the loan book as of June 30, could rise significantly if the macro picture worsens. This would result in substantial losses for the business. Although targeting a high-income customer provides a bit of a security cushion, even those borrowers will be feeling the pinch in a severe recessionary scenario.
What will happen to the economy in the near term, and if so, what does it mean? This gives SoFi shareholders something to pay close attention to in the next few quarters.