“Shareholders of SoFi Technologies (NASDAQ: SOFI) have endured a tumultuous period, with the stock plummeting 35% this year and trading significantly below its peak by 75%. Despite this steep decline, potential investors are eyeing an opportunity, given the current price-to-sales ratio of 2.9, well under historical averages.
However, before diving into this fintech stock, it’s crucial to grasp a key risk factor.
Shifting Loan Focus
Initially recognized for student loan refinancing, SoFi has evolved into a comprehensive digital banking platform offering various financial services including checking accounts, savings accounts, credit cards, and investment solutions. While expanding its offerings, SoFi’s primary function remains lending, with personal loans emerging as a pivotal product. Over the past year, it has originated $31 billion in personal loans, surpassing its $9 billion in student loan originations.
The federal government’s temporary suspension of student loan interest and repayments during the pandemic understandably dampened demand for student loan refinancing. Although this pause concluded in autumn 2023, SoFi redirected its attention towards personal lending during this period.
Yet, this strategic shift poses potential challenges. Personal loans, unlike student loans, are unsecured and carry higher interest rates, boosting SoFi’s interest income but heightening balance sheet risk. In an economic downturn, consumer spending prioritizes essentials, potentially increasing delinquencies and losses for SoFi.
Moreover, the surge in personal loan borrowing may reflect broader economic concerns, including inflation above the Fed’s target, corporate layoffs, and elevated credit card debt, signaling financial stress among borrowers.
SoFi’s loan portfolio composition could revert gradually, though. Despite personal loans comprising 65% of its portfolio in Q1, student loan originations surged by 43% year-over-year, outpacing the 11% growth in personal loans.
Addressing Investor Concerns
A mitigating factor is SoFi’s focus on a affluent clientele, with its borrowers boasting average incomes around $150,000 and FICO scores above 740. This demographic resilience could offer stability amid economic uncertainties.
In conclusion, while SoFi presents an intriguing investment opportunity at current valuation levels, investors must weigh the risks associated with its evolving loan portfolio dynamics.”
