SOFI Stock Analysis: A High-Reward Bet in Digital Banking or a Recession Time Bomb?

Stocks to sell

Is SoFi Technologies (NASDAQ:SOFI) really disrupting the banking industry or just putting a new sheen on a traditional business? The digital banking outlet certainly wants you to believe it is delivering a paradigm shift in how we bank but whether this new model is sustainable remains to be seen. This SOFI stock analysis will reveal the truth.

Not only are retail investors attracted to SOFI stock but Wall Street pros are too. Cathie Wood’s Ark Invest funds were buying up shares last week as was Ken Griffin’s hedge fund Citadel Advisors. Other institutional investors have also added shares. With the stock down 16% year-to-date and nearly 30% from its 52-week high, is now the time to buy in?

A SOFI stock analysis suggests investors should use caution. The digital banking company is a high-risk, high-reward stock that will experience a lot of volatility. Yet it is also one that could implode spectacularly in a recession. Let’s look at how you should proceed.

Risk rises with expansion

Student loan refinancing remains SoFi Technologies’ bread-and-butter business. Especially since the start of repayments began last October, the high-interest rate environment makes SoFi’s refinance rates attractive. 

However, household debt is skyrocketing as consumers use credit cards to get by. Delinquencies for all kinds of debt are rising, including mortgages, credit cards and auto loans. Student loans are a special case as the federal government is protecting borrowers for one year from the worst impact of being delinquent. Still, only 60% of student loan borrowers who were required to make a payment last October did so by mid-November.

With high-interest rates and high inflation, 2024 might not be as kind to SoFi. Its balance sheet will become far more exposed to consumer credit risk than it ever was previously. At the end of December, the lending business represented 67% of 2023’s total revenue. This is an important part of this SOFI stock analysis.

Creating more opportunities for growth

Yet through the power of partnerships, the digital bank has built out an impressive array of products and services. The fintech offers a full complement of banking options compared to its roots as a student and personal loan outfit. It creates opportunities for SoFi Technologies to become a one-stop shop for a household’s entire financial situation. By cross-selling products, customer acquisition costs can be cut and make itself more “sticky” to consumers. And if switching costs rise, customers will choose to stay with SoFi.

Yet the online bank will need time for its product portfolio to assume a larger percentage of sales. While the number of members using its services has rapidly increased to 7.5 million at the end of last quarter, they only use about 1.5 of SoFi’s products or services on average. CEO Anthony Noto doesn’t expect that to increase any time soon. He told analysts back in July that it won’t be until member growth slows that SoFi will see an appreciable increase in products per member.

Although low product usage is partially a result of the rapid rise in customers and products, it also creates a chance for competitors to lure away members with their own programs. So while SoFi wants to be the one-stop shop, it’s not there yet and won’t be for some time. That means SoFi has no real competitive moat at the moment though it can develop one in time.

Is the reward worth the risk?

SOFI stock is in good financial condition but investors need to watch the credit quality of its borrowers. A recession could seriously upend the digital bank’s finances if its borrower delinquency rises, or worse, begin defaulting. Right now SoFi’s young, high-income customers appear to have high-quality metrics. to insulate it.

Because SoFi assumes a higher credit risk as it branches out into more areas, the health of the economy plays a key role in its future. It is also an unprofitable company. That is why a SOFI stock analysis recommends only risk-tolerant investors buy this stock.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.

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