Don’t buy SoFi stock until you know this 1 key risk

SoFi technologies (NASDAQ: SOFI) is undoubtedly an emerging financial services provider. Its fully digital solutions and perfect user experience are enjoyed by customers.

But the actions were extremely disappointing. They are now trading over 70% below their peak. This year alone they are down about 30%, which is worrying given the 17% increase in Nasdaq Composite Index (from August 15).

You might consider buying this stray fintech stock right now, hoping a comeback is in the cards. But before adding SoFi to your portfolio, it’s critical to take the time to understand one very important risk factor.

Personal credit activity

SoFi was founded in 2011 with the aim of providing financial solutions to students. However, the business has changed course in recent years.

Since the start of 2022, a period spanning 10 quarters, SoFi has originated $31 billion in personal loans. That total is far more than the roughly $6 billion in student loans it generated. Consequently, on June 30, 62% of SoFi loans on the balance sheet are represented by loans for personal needs.

The average yield on company personal loans is more than twice that of student loans. From SoFi’s perspective, personal loans are inherently riskier. That’s why they charge higher rates to compensate for the potential a implicit.

With economic uncertainty at the forefront of everyone’s mind, SoFi could be looking at big losses in an adverse situation. When times get tough, people will make paying for the essentials a priority. They could end up defaulting on the loan. In Q2, the annual default rate for personal loans was close to 5%.

It could also be argued that with persistent inflationary pressures and the fact that Americans carry a record $1.1 trillion in credit card debt, the increase in personal lending activity is a clear indicator of tough times ahead . We will have to wait and see.

For what it’s worth, CFO Chris Lapointe mentioned on the Q2 2024 earnings call that the average SoFi personal loan customer has an annual income of $168,000 and a FICO score of 757. In theory, that should mitigate the risk of huge losses of non-payment. . However, in a recession, you can still expect even affluent consumers to feel some pressure.

As we look to the future, perhaps SoFi will begin to return to its roots. The end of the student loan moratorium last fall, when payments for borrowers resumed, could help boost refinancing activity. We are already seeing the benefits of SoFi.

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Last quarter, the business originated $737 million in student loans. This figure increased by 86% year-on-year. It accounted for almost 14% of all lending activity in the three-month period, well above the proportion in Q2 2023.

Should You Still Buy SoFi Stock?

Investors should always identify and understand the risks their businesses face. Appreciating any negative factors is essential before buying shares in a company because you realize what can actually go wrong.

However, I still see SoFi as a worthy investment candidate. We mentioned earlier how well products and services resonate with consumers. The current customer base of 8.8 million is 41% higher than a year ago, showing remarkable gains. This contributed to a 20% increase in revenue in Q2.

More importantly, and a trend that reduces financial risk, is that SoFi has now reported three consecutive quarters of GAAP net income (GAAP).

The stock was hammered. However, the core business continues to grow the top line at a brisk pace. And the bottom line is set to grow in the coming years, according to the management team. The historical cheap price-to-sales ratio of 2.9 adds more upside for the patient investor.

Should you invest $1,000 in SoFi technologies right now?

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Warning: Don’t Buy SoFi Stock Before Knowing This 1 Key Risk was originally published by The Motley Fool