SoFiTechnologies(NASDAQ: SOFI) has done an excellent job of expanding its customer base and growing sales. However, the country has suffered sluggish credit growth in the high interest rate environment, leading to investor skepticism about its short-term prospects. As a result, the stock remains 62% below its 2021 all-time high.
However, the company has identified multiple levers for growth and is seeing encouraging progress in its non-consumer businesses. If you’re considering buying SoFi today, here’s what you need to know.
In its early days, SoFi focused on helping people refinance their student loans. In 2020, the pandemic and policies around student loan forbearance forced SoFi to reevaluate its business. One area that helped drive continued growth was personal lending. From 2020 to 2023, SoFi’s personal loan volume grew from $2.6 billion to $13.8 billion.
The higher interest rate environment of recent years has been a double-edged sword for SoFi. On the one hand, consumers have had to contend with higher interest rates, which could make it harder for them to pay off their debts.
In the second quarter, SoFi wrote off $151.8 million in personal loans, yielding a 3.84% repayment rate on its $15.9 billion personal loan portfolio. This is up from 2.94% a year ago and is a metric that investors have been watching closely. Over the past few years, charge-offs have increased across the banking industry, which many attribute to normalizing conditions rather than systemic consumer weakness.
Additionally, SoFi expects lending segment revenues to decline 5% to 8% compared to last year. CEO Anthony Noto told investors during the first quarter that the fintech is “taking a more conservative approach in light of macroeconomic uncertainty.”
Conversely, higher interest rates have allowed SoFi to grow its net interest income significantly. A major reason for this was the acquisition of Golden Pacific Bancorp in 2022, which allowed SoFi to maintain deposits and therefore take on more loans on its books. Since the bank’s acquisition, total deposits have grown to nearly $23 billion, thanks to its high-yield savings accounts that offer annual returns of up to 4.5%.
Last year, SoFi brought in nearly $1.3 billion in net interest income, up more than 400% from 2021. This solid growth continued in the first half of this year, with net interest income increasing 55% to $815 million.
SOFI Chart Total Deposits (Quarterly).
SoFi’s banking business is growing steadily, but what excites me is the potential of the technology platform. In recent years, the company has made significant investments in Galileo and Technisys to develop a robust technology infrastructure aimed at bringing banking services to non-banking businesses.
Galileo acts as the backend infrastructure for fintech companies without banking charters, allowing them to process payments and offer various banking services through SoFi.
Meanwhile, Technisys replaces outdated legacy systems that hindered rapid innovation and can simultaneously support multiple products, run in the cloud and enable banks to process and analyze data in real time. With this powerful technology stack, SoFi aims to ‘Amazon Fintech Web Services (AWS).”
SoFi’s technology platform has grown into a significant company and can provide stability thanks to long-term contracts. In the first half of this year, the technology platform generated net revenue of $190 million, up 15% year-over-year, and boasted a robust profit margin of 33%.
On October 14, SoFi announced a $2 billion business lending platform deal for personal loans with funds managed by Fortress Investment Group. Noto said in a press release that the agreement will help the company “diversify into less capital-intensive and more fee-based revenue sources.” The agreement shows that investor risk appetite for SoFi’s loans may be returning after skepticism over the aforementioned rising charge-offs.
SoFi has done an excellent job in recent years of growing its presence in the banking industry and rapidly expanding its deposit base, and its profits continue to improve as the company leverages multiple growth engines within its business. The company has done a great job in recent years of adding customers and improving the economics of its business. That’s why I think the stock is a solid buy for long-term investors today.
Consider the following before purchasing shares in SoFi Technologies:
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Is SoFi Stock a Buy? was originally published by The Motley Fool
